Neo-conism unravels as chicken return to roost

Reserve Bank of Malawi (RBM) Governor Charles Chuka is a good man pursuing a bad monetary policy in an environment where the anchoring architecture and inherent national culture remains tied to a controlled—if fairly mixed—economic system.

I know free-market believer Chuka means well. But the neo-liberal agenda, which has been discredited globally—even in the United States (US) where it originated—that the Joyce Banda administration has allowed Western institutions to impose on Malawians, is proving disastrous.

The primary responsibility of any central bank governor is to control prices, a task that is eluding the monetarist despite throwing every policy tool at his disposal to tame the now volatile inflation rates. Our local currency, the kwacha, which the RBM is supposed to manage, has been thrown to hungry wolves along Victoria Avenue and other financial streets across the country.

And being the ravenous wolves that they are, they have devoured the local unit, sending it off bleeding to the mama, RBM, which has abdicated its duty. Clearly, a floating exchange rate cannot properly work in a country that imports more than it exports.

Inflation figures that the National Statistical Office (NSO) released this week are scary not just in the short to medium term, but in the long term as well. The general rise in prices hit a seven-year high of 28.3 percent in September, 2.8 percentage points above the 25.5 percent recorded in August and 11 percentage points more than the May figure when Chuka took over. Look at the trend in the graph I have plotted.

It reminds me of the period between the early and mid 2000s when inflation galloped to as high as around 40 percent. Much to my chagrin, it looks like we are headed back there, which means brace for interest rates to hit more than 50 percent.

While this latest headline inflation number is attributable to food and fuel prices, a look at the core inflation figure has worried me so much that I am convinced that double digit inflation is here to stay for several years and nothing the Economic Recovery Plan (ERP) will do could change that trajectory. In other words, the effects of perpetually rising fuel prices are not pass-through or transitory as it were.

“Food inflation has gone up by 27.7 percent compared to 2.7 percent during the same period last year. Core inflation has gone up by 28.8 percent compared to 12.5 percent during the same period last year,” said the NSO. That is the statement in the Stats Flash that has numbed me. Here is why. Core inflation measures the general rise in prices by excluding certain items that face volatile price movements or, to put it another way, it takes out from the Consumer Price Index (CPI) products such as energy and food that bring temporary price shocks. Given that core inflation usually points to underlying long-term inflation, it means that we have to prepare for stubborn headline inflation for a number of years even as the RBM pursues a tight monetary policy, which is already leading to lagged growth. Again, policy failure is seen in the manner the RBM-driven high interest and liquidity reserve ratio has failed to tame inflation, but succeeding to derail growth.

And if you take into account our new liberal thrust which has brought back the automatic pricing mechanism (APM) and exposed the kwacha to the predatory behaviour of markets who will be determining its price, the cost push effects of both depreciation and rising fuel prices also point to troubling times in terms for the cost of living—leaving long-term inflation expectations highly unstable.

That is why when the RBM and some policy wonks say things will get better in a year, it reminds me of the claims made by the Ministry of Finance that you can have an austerity budget and expect to maintain high economic growth rates.

I debunked that mythology on this column and I have been vindicated with gross domestic product (GDP) now revised sharply down to an anaemic 1.6 percent. Even that is on the conservative side because we may actually be looking at a recession—if we are not in that territory already.