Inflaton drops to six-year low

After six years of waiting, the country’s year-on-year inflation rate dropped to a single digit, thanks to fiscal and monetary policies as well as a drop in food prices.

Food has a huge weight at 50.1 percent in the Consumer Price Index (CPI), a measure that examines the weighted average price of a basket of consumer goods and services.

The continued drop in inflation has given hope to authorities on attaining a single digit inflation rate for the next five years as envisaged in the draft Malawi Growth and Development Strategy (MGDS) III.

With November inflation easing to 7.7 percent, Malawi’s headline inflation rate in 11 months from January to November 2017 has averaged 12 percent, according to our calculation, which is within the authorities’ annual target for  2017.

Inflation rate opened the year 2017 at 18.2 percent

The inflation rate drop has  given monetary authorities impetus to cut the policy rate—the rate at which commercial banks borrow from the central bank as lender of last resort—by 11 percentage points since November 2016.

The rate is now at 16 percent, a development which is expected to compel commercial banks to reduce further the interest rates to induce borrowing by individuals and firms for productive purposes.

Reserve Bank of Malawi (RBM) officials and some economic commentators have said the continued drop in inflation rate is an indication that the country’s economy is on the right path.

In a recent interview, CDH Investment Bank chief executive officer Misheck Esau said the continued drop in inflation is good news.

“Inflation coming down to 7.7 percent is great news and a major milestone for the economy. I salute all those who handled the hunger crisis when we had a drought. The timely interventions produced results that we all are about to enjoy now,” he said.

Esau said the drop in inflation could trigger further interest rate cuts going forward.

RBM spokesperson Mbane Ngwira said the attainment of single digit inflation will spur savings as people gain confidence in the market knowing that its value will not be eroded by rising inflation.

On the other hand, Treasury spokesperson Davis Sado said they expect the decline in inflation to be sustained in 2018 as they anticipate the micro-economic environment to continue stabilising.

“Food inflation has contributed a lot as projected following an increase in food crops production and we expect the decline trend on inflation to be sustained next year with expectations that the micro-economic environment will continue to be stable,” he said.

In an earlier interview, International Monetary Fund (IMF) resident representative Jack Ree said the continued decline in inflation rate shows that the current decline is firmer and speedier than many thought.

“The speed of the decline in inflation during the last six months or so has been quite dazzling. Now that it has reached the single digit range, one could naturally have expected that it may take a break for a while.

“That did not happen [and] inflation is now moving right towards the interior single digit zone,” he said.

However, economists said there was need to watch the movement of non-food inflation, arguing that it has the potential to reverse the gains made in food inflation over the past 12 months.

Another risk could be the projected repeat of the 2015 weather pattern in which some parts experienced extreme drought and episodes of heavy flooding, according to the Southern African Regional Climate Outlook, which may result in poor crop output.

Economist Gilbert Kachamba, who also lectures at Catholic University, said while low inflation is a dream for every economy, the worry for most Malawians is the transformation of this downward trend to real life experiences.

“The non-food sector is still having a higher rate, making it difficult for typical Malawians to appreciate this lower inflation rate.

“My hope is that this lower rate is sustainable so that in the long run Malawians will appreciate the lower inflation rate,” he said.

The drop in inflation rate means prices of goods and services will be rising at a reduced rate.

In a paper published in August this year titled The Current Maize Prices: A Robbery to Farmers and Hence to the Economy, Centre for Social Concern (CfSC) described the easing inflation as nothing the country should smile about as farmers are crying foul due to the current maize prices on the market, saying the trend in maize prices defeats the whole purpose of the right to food as the gate price offered to farmers is way below the breakdown price.

Last year, Malawi produced a surplus of about 30 percent over the previous year’s output, according to the Ministry of Agriculture, Irrigation and Water Development.

Because of the availability of the commodity on the market, prices at one time crashed to around K50 per kilogramme (kg) against the government’s recommended K177 per kg.

However, Finance, Economic Planning and Development Minister Goodall Gondwe said if what government has been doing to reduce inflation works for the next year or two, this could result in the rate of poverty declining.