IMF Survey : Malawi: Tackling Inflation Key to Sustainable Growth

IMF News, January 6, 2016

Source details

Canonical URL: IMF Survey : Malawi: Tackling Inflation Key to Sustainable Growth

Reducing inflation is the most important policy issue for Malawi in the near term.
Currency depreciation and uncertainty about the future direction of policies have kept inflation above 20 percent on average.
The economy remains heavily dependent on aid flows and is still feeling the effects of the large-scale theft of public funds uncovered in 2013 (the “cashgate” scandal).
Donors suspended all budget support after “cashgate,” forcing the government to print money to cover the deficit.
A poor maize harvest caused by heavy floods and drought in early 2015 raised food prices and pushed inflation up further.
If left unaddressed, inflation “will become entrenched, continue to hurt investment and growth, and worsen living conditions, especially for the poor.”

Real GDP growth averaged only 4 percent during 2012–15 and was significantly below the 7 percent targeted under Malawi’s Growth and Development Strategy.
Malawi is heavily dependent on a narrow commodity export base dominated by tobacco, increasing vulnerability to large shocks.
Progress in the social sector includes achieving gender parity in primary school enrollment, improving access to water, and further lowering infant mortality, which has been below the average for sub-Saharan Africa since 2004.
Financial sector depth and inclusion increased steadily through 2012 but have since stagnated due to persistently high inflation and structural obstacles.

Inadequate fiscal adjustment following “cashgate” affected the financial sector through several channels:
- Non-performing loans increased due to accumulation of domestic payment arrears to private suppliers who experienced difficulties in servicing loans.
- Credit risk emerged as the most significant threat to the banking sector.
- Financing the deficit through increased recourse to domestic financing crowded out bank lending to the private sector.
- Stubbornly high inflation contributed to higher interest rates and greater exchange rate volatility, increasing the cost of servicing domestic debt.
Structural obstacles identified include limited access to credit, unreliable electricity supply, and high transportation costs.
Half of the people living in the rural areas do not have access to financial services, as these services are mainly available in urban areas.

The report emphasized the importance of restoring macroeconomic stability in the near term through the pursuit of tighter fiscal and monetary policies geared toward placing inflation on a declining trend.
Authorities were encouraged to implement structural reforms to:
- Remove supply bottlenecks,
- Increase agricultural productivity,
- Improve the business environment.
The report highlighted that alleviating structural barriers would bring substantial benefits in terms of reducing poverty and attaining sustainable and inclusive growth.

Bold economic reforms undertaken in mid-2012 were credited with greatly improving the economy’s resilience, including:
- Devaluing the Kwacha,
- Adopting a floating exchange rate regime,
- Liberalization of the foreign exchange market,
- Introduction of an automatic fuel price adjustment mechanism.
These reforms helped increase foreign exchange reserves from one month of import cover to over 3 months.

Source: IMF Survey : Malawi: Tackling Inflation Key to Sustainable Growth (IMF NEWS, January 6, 2016)