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Single digit inflation target questioned

A graph showing inflation movement
A graph showing inflation movement

A local economist has described as ambitious the single digit inflation target by the end of this year as envisioned by the International Monetary Fund (IMF).

The IMF in a press statement issued after the completion of the third and fourth reviews of the Extended Credit Facility (ECF) last week urged authorities to continue with a tight monetary policy and fiscal restraint to stabilise the exchange rate and achieve a single digit inflation by the end of 2014.

Alex Nkosi, social conditions research programme officer for Centre for Social Concern (CfSC) argued yesterday that the pursuance of that target could lead to higher interest rates.

He said the target is “too ambitious” bearing in mind that this is an election year where both government and political parties will raise their expenditures.

This, Nkosi argued, will increase money supply which will consequently push up inflation

He feared that the proposal by the IMF to authorities to uphold tight monetary policies may trigger a rise in interest rates which will negatively affect the common person and businesses.

“I wonder how the single digit inflation will be achieved. The IMF always sticks to policies although they did not work previously. These policies have always led to more pain with the common person facing the blunt,” said Nkosi.

In their end of year assessment of the economy, the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) noted that inflation is likely to be out of control this year when cashgate money starts vote buying.

The Reserve Bank of Malawi (RBM) has been implementing a tight monetary policy since May 2012 including raising the bank rate, increasing the Liquidity Reserve Requirement (LRR) and mopping up excess liquidity to rein in inflation, a move that has led to an increase in interest rates.

Regardless of the tight monetary policy, inflation stood at 22.9 percent in November 2013, according to the National Statistical Office (NSO), way off government target after peaking at 37.9 percent in February.

Government expected that inflation would slow down to 14.2 percent by December 2013 and to seven percent by December 2014, arguing the economy was recovering.

However, the IMF has noted that authorities are committed to closely monitor expenditure execution and financing to prevent a recurrence of the fiscal slippage that resulted in a substantial increase in domestic borrowing during the first quarter (Q1) of the 2013/14 fiscal year.

The IMF also noted that Malawi’s macroeconomic performance under the ECF remained broadly satisfactory and the policy reforms initiated in May 2012 are showing positive results, but worried that cashgate and aid freeze has negatively affected the macroeconomic outlook.

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One Comment

  1. Malawi is capable of 2% inflation rate! People of Malawi deserve better than being lambasted with this 23 % salary cut every year that they did not sign up for! Inflation used to be a problem for all countries around the world but that has since changed by moving away from the use of monetary targets. What Malawi has is a runaway inflation and it must be brought under control as a matter of urgency – no excuses.
    What options are there for inflation control? 1) Monetary aggregate targeting is one option. Countries around the world used to use this option but they have abandoned it because the relationship between monetary aggregates and goal variables (inflation) is not as rock solid as once thought. Malawi is still using monetary aggregates with no success. 2) exchange rate pegging is another option that has been abandoned. 3) The Nike option (Just Do it) is currently practiced by the US only where no monetary anchors are used, generally speaking. However, the US micro and macro indicators are thoroughly analysed that I would not advocate this option to any faint hearted economy. 4) “Inflation targeting” is now the popular option for combating inflation. Small New Zealand started it. Canada adopted it. The UK after pulling out of the ERM (European exchange rate mechanism) adopted it. Many countries have since adopted it.
    Why should RBM adopt an inflation targeting strategy? For once, it is easy to tell the public what RBM does – it controls inflation; thereby providing transparency. Instead of focusing on monetary hypotheticals, the target will bring focus to the Malawi domestic economy to determine the real drivers of inflation (price index, exchange rate, monetary, fuel imports etc). Velocity shocks will become irrelevant to controlling inflation since monetary policy will not require a stable money-inflation relationship anymore. Finally, an inflation target brings accountability on the part of monetary authorities at RBM since they are held to account for their declared target. The effect might be slow at first due to long lags of monetary policy effects but boy oh boy is it worth it. RBM should explore this inflation targeting as a serious option. Let every other indicators vary to meet the inflation target of 2%. Finance ministry and RBM must work jointly together to bring the beast under control.
    Other than that and thinking outside the box, does the Malawi price index need to exclude or take into account or adjusted for the following: food basket mix, terms of trade effects, indirect taxes or effects of interest rate variations on the index?
    Why is inflation control another cryptogram for Malawi? Always on the wrong side of world statistics. Below is a link that shows Malawi in top 10 worst inflation controllers in the world. I can understand why South Sudan but the beautiful Lake Malawi? Malawi is using wrong instruments for inflation control. That is not a criticism but tough love from yours truly and a rallying call for action! Set 2% target and let us go!
    http://en.wikipedia.org/wiki/List_of_countries_by_inflation_rate
    As for cash-gate money driving up inflation, it is unlikely because for a start the money must be confiscated and accounts frozen so these criminals cannot splash as if they were Michael Jackson! Secondly, even if they did, the impact would be negligible.
    Shift in inflation control mechanism is long overdue and yes single digit inflation would be easily achievable, cateris paribus!

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