The International Monetary Fund (IMF) has projectd 2019 annual inflation rate at 8.9 percent whose success largely dwells on fiscal management.
In a written response to a questionnaire on Wednesday, IMF resident representative Jack Ree said the good inflation foot print in 2018 indicates that this target is achievable. But he said it will take a lot of political will to lean against the pressures for spending.
Ree said if authorities can make this happen, then the impact on medium term inflation expectations will improve.
“Whether the Reserve Bank of Malawi [RBM] can maintain low and stable inflation will very much depend on what happens to the fiscal management, especially in the run up to the election. Track records tell a lot about who we are.
“And unfortunately, Malawi’s track record of macroeconomic management was not great particularly during the election times—to the extent that the past five elections were coincided with four waves of big inflation episodes. These inflation waves, of course, resulted from runaway fiscal spending during election times,” he said.
Malawi’s annual headline inflation rate for 2018 was recorded at 9.2 percent, which is below the Reserve Bank of Malawi (RBM) projected target of 9.3 percent and in line with a forecast of attaining single digit inflation by the central bank.
In his reaction on Sunday, RBM spokesperson Mbane Ngwira said this gives the central bank more confidence that its target of five percent inflation by the first quarter of 2021 may be achieved earlier than projected.
“The risks ahead are not of the magnitude that we faced in 2018. The main risk that we see is the performance of the agricultural sector. If the rains continue on a good note up to end February and the agricultural sector performance is quite good, then we may attain our objectives earlier than anticipated. Therefore, as the economy continues to stabilise, we expect economic aggregates such as interest rates to follow suit,” he said.
Maize, as part of food, constitutes 45.2 percent of the Consumer Price Index (CPI), which measures changes in the price level of market basket of consumer goods and services. A 50kg bag of maize now costs an average of K10 000 from an average of K5 000 in June 2018.
Inflation is a macroeconomic variable, which together with interest rates and exchange rates, give indication of stability of an economy.
Ree, however, said attaining set targets requires both a strong institutional autonomy and competency of the central bank, especially in terms of the ability to forecast inflation. n