Malawi, others tipped on growth, inflation
The World Bank has asked Malawi and other African countries with “persistently high levels of inflation” to maintain a tight monetary policy despite fears that fiscal policies alone cannot promote inclusive growth on the continent.
The recommendation comes after an observation made in the April 2024 issue of the Africa Pulse Report that the continent’s economic growth, which is expected to rebound from 2.6 percent in 2023 to 3.4 percent in 2024, not enough to contain the high poverty and inequalities.
The bank has projected that inflation will moderate to two percentage points from a median of 7.1 percent in 2023 to 5.1 percent this year, but expressed concern that the cost of living remains high compared to pre-Covid-19 pandemic levels.
In an e-mailed statement accompanying the report, World Bank chief economist for Africa Andrew Dabalen said economic growth is important for promoting economic inclusion but stressed that it has a weaker influence on eradicating poverty and inequalities in Africa than other regions.
He is quoted as having said: “Per capita GDP [gross domestic product] growth of one percent is associated with a reduction in the extreme poverty rate of only about 1 percent in the region, compared to 2.5 percent on average in the rest of the world.
“In a context of constrained government budgets, faster poverty reduction will not be achieved through fiscal policy alone. It needs to be supported by policies that expand the productive capacity of the private sector to create more and better jobs for all segments of society.”
The bank report further observed that inequalities remain the highest in Africa, with the continent lying second from last after the Latin America and Caribbean region, as measured by the Gini-coefficient.
To mitigate the effects, the report calls for a strong adherence to monetary fiscal discipline and improving debt management and transparency that can ultimately lead to lower borrowing costs, thus “generate fiscal savings, which can then be used for development objectives”.
The Bretton Woods institution further recommends that countries with “stubbornly” high-levels of inflation, including Malawi, Ethiopia, Nigeria, Sierra Leone and Zimbabwe “maintain restrictive monetary policies” to promote price stability.
However, economic analyst Bond Mtembezeka expressed skepticism that restrictive monetary policies would work in a developing country such as Malawi.
In a WhatsApp response, he said: “Tight monetary policy only becomes efficacious enough when the kind of inflation is predominantly a demand pull kind of inflation as opposed to cost push.
“Raising interest rates amidst cost-push inflation only fuels the prices of goods and services. That’s why such a monetary policy stance results in stagflation where inflation skyrockets amidst subdued economic growth as it is happening now in Malawi.”
Economic analyst and statistician Alick Nyasulu agreed with Mtembezeka, saying the ‘one-size-fits-all approach” of tight monetary policies that has worked well in advanced economies has proved ineffective in developing countries such as Malawi because of the dynamics in the local financial market.
He said: “We know that tight monetary policy works well in advanced economies. Our credit market is dominated by the government and a countable number of companies whose borrowing appetite is never deterred by tight monetary policy.”
Inflation in Malawi is hovering at 33.5 percent after decelerating from 35 percent in December despite the Reserve Bank of Malawi raising the policy rate from 12 percent in January 2021 to 26 percent in January this year.
The inflation rate is significantly higher than the five percent threshold set by the central bank.
Meanwhile, data from the World Bank shows that over the same period, growth rose 0.7 percentage points from 0.9 percent in 2022 to 1.6 percent of GDP in 2023.
