December is not known for good economic news in Malawi. In this month—part of the so-called lean period that starts around November and stretches to February—life is hard for both households and firms.
In this month, food shortages become widespread, inflation usually heads upwards and the local currency, the kwacha, pants under pressure.
But this time, things are a little different. The country is generally food secure although some districts in the southern region such as Balaka, Nsanje, Chikwawa and Mwanza—which were hit by dry spells and armyworms in the past growing season—may still need food aid.
But at national level, food availability appears to be guaranteed.
The National Food Reserve Agency (NFRA) that stockpiles strategic grain and the Agriculture Development and Marketing Corporation (Admarc) may have accumulated roughly 200 000 metric tonnes of maize in silos and warehouses so far.
And given that the harvest season is just two to three months away, people who kept some maize are sending it to the market where it is further sinking prices of the grain and with it, food inflation.
And because of maize’s dominant weight in the consumer price index (CPI)—headline inflation now hovers around eight percent.
It is probably this positive inflation story that has given Reserve Bank of Malawi (RBM) Governor Dalitso Kabambe to cut the policy rate to 16 percent from 18 as the Monetary Policy Committee that he chairs sees a favourable inflation outlook. Kabambe may, however, wish to slow down a little and watch the market further. While food inflation is slowing sharply and having a positive impact on headline inflation, non-food inflation is not exactly being a team player.
Nico Asset Managers notes in its latest economic report that “while the month-on-month food inflation has declined by 0.30 percent to 4.80 percent in October 2017 from 5.10 percent in September 2017, non-food inflation has increased by 0.10 percent to 11.70 percent from 11.60 percent over the same period.
Furthermore, the kwacha has slightly depreciated since the end of the tobacco selling season in October-November, which might exert some inflationary pressures.
Besides, there remains uncertainty on agricultural output for 2018 as the first round crop estimates may only be ready at the end of January next year.
Risks to production remain, including pests such as army worms, floods and even dry spells.
So, yes, we have a bold central bank governor who is ready to take risks and refuses to allow fiscal policy to fully dictate money policy and who does not get too jittery with a little mood swings in the economic fundamentals.
Most importantly, he is sending strong signals to the real sector that he wants monetary policy to help spark high growth rates through cheaper costs of borrowing that allows firms to produce more and households to spend; that he will not pursue a tight monetary policy at the expense of growth.
He is taking a gamble that I hope will pay off. In that context, the financial sector must respond in kind through reciprocal cuts in base lending rates and work harder to narrow the spread between lending rates and deposit rates.
But like I said, Kabambe may wish to slow down and see how the recent policy rate cuts will course through the economy.
Indeed, we don’t know yet what will be in the mid-year budget review and we have no idea how the market will react to fiscal pressures that Finance, Economic Planning and Development Minister Goodall Gondwe may spring on us come February.
Indeed, the next budget is likely to be an election fiscal plan likely to be full of unproductive spending, mostly pork to appease the masses.
And the fact that domestic debt is already hovering around K1 trillion—in the touching sphere with the national budget—should send warning bells that we are in dangerous territory—so dangerous that a loose monetary policy as we see it now could have serious consequences in the medium term.
I, therefore, urge caution at the moment.