IMF urges tight fiscal, monetary policies

 

The International Monetary Fund (IMF) has advised authorities to tighten fiscal and monetary policies to fend off forces of inflation spike.

IMF’s advice comes on the backdrop of inflation rate for January 2018 rising by one percentage point to 8.1 percent from 7.1 percent in December 2017 largely due to rising food prices.

In a written response to a questionnaire, IMF resident representative Jack Ree said the pick-up in inflation rate is not surprising.

 

The rise in maize prices is driving up inflation

He said: “Inflation picked up mainly driven by a reversal of the disinflation trend of food price which had been foreshadowed by recent increases in maize price.  However, there are some silver linings. First, non-food inflation continued to ease in January, following a trend of steady disinflation since early last year. As a result, it finally entered the single digit range.

“Second, the consumer price index [CPI] has been finally updated to better reflect household’s consumption pattern these days, with the weight of food decreasing a bit. This will help technically moderating the impact of the rebound of food inflation.”

Ree, however, said the January inflation outturn proves that while the country achieved remarkable results in its fight against inflation, the war is not over yet.

In an interview, Economics Association of Malawi (Ecama) executive director Maleka Thula said the reversal in the direction of inflation was expected following increase in maize prices.

“The magnitude of increase in the overall inflation has been somewhat modest due to downward revision of food inflation weight in the inflation basket. The revision of food inflation weight is more realistic as costs of non-food items are becoming more significant on households’ consumption baskets,” he said.

As of now, a 50 kilogramme (kg) bag of maize is selling at around K8 000 from K5 000 at the end of December 2017 largely due to the fears of deficit occasioned by the combined effects of dry spell and fall armyworm attack which could reduce output by about 40 percent, according to the Ministry of Agriculture, Irrigation and Water Development.

As a result of the increase in prices of maize—which has a huge weight in the food component in the CPI—food inflation increased by 3.3 percentage points to 7.6 percent in January 2018 while non-food declined from 10 percent to 9.6 percent.

The index weights are based on recently revised expenditures of both urban and rural households weight with food now constituting 45.2 percent in the CPI. Prior to January, food had a weight of 50.1 percent in the CPI.

Fiscal authorities desire to maintain single-digit inflation in the next five years accompanied by an average growth rate of at least seven percent, according to Malawi Growth and Development Strategy (MGDS) III.

Government hopes to contain the single digit inflation with a strict monetary policy by ensuring that the commercial borrowing rate is affordable to the private sector to induce higher levels of investment.

Earlier, dean of social sciences at the Catholic University Gilbert Kachamba doubted that government will contain the single digit inflation, which he said is premised on erratic raid-fed agriculture.

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