International Monetary Fund (IMF) economist Dong Frank Wu has advised monetary and fiscal authorities to pay special attention to domestic non-food market and monitor any new direction of price movements.
In a paper dated March 2017 titled Understanding Inflation in Malawi: A Quantitative Investigation, the economist said non-food market has an upper hand in spiking up inflation rate, currently at 18.2 percent as of January 2017, according to the National Statistical Office (NSO).
Dong noted that headline inflation—a measure of the total inflation within an economy, including commodities such as food and energy prices—has remained elevated after the adoption of the floating exchange rate regime in 2012 although adverse weather-related shocks have also played an important role in driving up inflation.
He said impulse response fluctuations of headline inflation show that movement in prices has become more responsive and resilient after the 2012 exchange rate regime shift in the face of shocks to real gross domestic product (GDP) growth, nominal effective exchange rate (Neer), broad money and Treasury bills (T-bill) rate.
Said Dong: “Compared to the response before the regime reform, the response of headline inflation to a one-unit shock to real growth is significantly higher and converges to the equilibrium level after period ten.
“This result is consistent with economic intuition that without price controls, economic variables move freely to absorb the shocks and enable the economy to return to equilibrium more quickly, reflecting stronger economic resilience.”
Dong said in response to the shock to the Neer, which is a measure of the value of a currency against a weighted average of several foreign currencies, the reaction of headline inflation after the regime shift also shows greater fluctuation, which takes about five periods to subside explained by capital flow management and price control before 2012.
On broad money, a measure of the money supply that includes more than just physical money such as currency and coins, Wu observed that the floating exchange rate regime has allowed headline inflation to absorb newly-injected liquidity causing it to increase.
He called on authorities to strengthen communication with the public and make policy design more transparent and credible, saying this would help to further reduce the variance of inflation.
Before the floating exchange rate regime was implemented, Malawi pegged its national currency to the dollar and kept an overvalued exchange rate.
After the economic reform in 2012, prices and exchange rates moved based on economic fundamentals, but their excessive volatilities adversely impact economic decisions.
Since this transition, both Malawi’s headline and annual average inflation have remained stubbornly high in double digit lane.
Malawi’s headline inflation has moved from 9.8 percent in December 2011 to 36.4 percent in 2012.
Between 2013 and 2016, inflation has hovered around 25 percent.
University of Malawi’s (Unima) Chancellor College economics professor Ben Kaluwa said as the situation stands, slowing inflation would require a sound investment in production.
“Indeed inflation has been soaring since 2012 when the exchange rate regime was changed, but as for now a consistent investment in food production is our only way out. Things have been looking good since last year where we saw inflation rate easing to the current 18.2 percent, but going forward we need to look into long term goals,” he said.
Kaluwa said strengthening budget control and improving public finance management though seen as crucial to anchoring inflation expectations may not be key in an economy like Malawi, which is largely dominated by agriculture
Catholic University head of economics department Gilbert Kachamba, in an earlier interview, said slowing down inflation is imperative for Malawi as it would help improve living standards of Malawians by bringing down the cost of living.