Easing inflation: how sustainable?

Inflationary pressure has begun to ease on account of declining global inflation, the expected food relief plan and the impact of monetary policy on the domestic market.

This has resulted in easing pressures on prices of both food and non-food items.

Despite upside risks emanating from global geopolitical conflicts, El Nino weather forecasts as well as fiscal and exchange rate pressures remain, the central bank is less pessimistic.

To this end, the Reserve Bank of Malawi (RBM) projects 2023 inflation at 28.2 percent, slighlty lower than its earlier projection of 29.5 percent, but far above the central bank’s target of five percent in the medium-term.

This, the central bank says, has made the outlook less pessimistic than predicted during the previous monetary policy committee (MPC) meeting.

However, Economics Association of Malawi (Ecama) executive director Frank Chikuta feels the easing inflation is not sustainable and could foil economic projections.

He says relying on food relief distribution exercise expected to reach 4.4 million people affected by hunger, is not enough to tame domestic inflation.

Says Chikuta: “When inflation is coming down, it is because government is supplying food from its reserves, which is not the best way to sustain inflation, but also, because government has no fiscal space to sustain such measure.

“We believe that this is a temporary decline as going into the lean period, food inflation may start to rise again.”

On his part, Financial Market Dealers Association of Malawi president Leslie Fatch said taking into account weather risks and exchange rate pressures, it would be difficult to sustain the declining inflation rate.

He said: “How much are we able to support that?”

In the third quarter, inflation averaged 28.2 percent, a decline from the 28.4 percent registered during the previous quarter (Q2 2023)and 25.3 percent registered during the same period last year (Q3 2022).

However, food inflation inched up to 38.5 percent from 38 percent in Q2 2023 and 33.5 percent in Q3 2022.

On the other hand, non-food inflation declined to 16.4 percent from 17.6 percent in Q2 2023 and 18 percent in Q3 2022.

Malawi is distributing free maize and cash to more than four million people facing food shortages largely because of the impact of Cyclone Freddy, which washed away thousands of hectares of crops in March.

The move comes in response to a recent report that said the situation is expected to worsen until the next harvesting season in March 2024.

Department of Disaster Management Affairs Commissioner Charles Kalemba is on record as having said the hunger response effort for this year would cost Malawi $226 million (about K267 billion).

 “We were able to raise about $78 million [about K92 billion] that we are going to use as cash transfers and government will provide 165 000 metric tonnes to cover the deficit,” Kalemba told The Nation on Monday.

Earlier, economist Exley Silumbu said rising food prices would continue piling pressure on headline inflation.

“Apart from natural shocks, a key factor is how forex generation or supply will be and, hence, how the exchange rate will behave. It’s quite an uncertain path for inflation to converge to the target rate or range,” he said.

RBM Governor Wilson Banda last week said the moderation in food prices was partly attributed to maize sales in some selected Admarc depots.

Inflation, the rate of the general rise in prices over a given period of time, has been on the rise for the past 12 months to August, largely due to increase in food and non-food items.

However, in September, Malawi’s year-on-year inflation declined to 27.8 percent from the 28.6 percent recorded in August 2023.