Malawi: Tackling Inflation Key to Sustainable Growth

SUMMARY

Reducing inflation is the most important policy issue for Malawi in the near term, the IMF said in its recent review of the country’s economy.

 
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  • High inflation stalling economy
  • Donor confidence lags after theft of public funds
  • Bold economic reforms help increase reserves
  • The report shows currency depreciation and uncertainty about the future direction of policies have kept inflation above 20 percent on average. The economy, heavily dependent on aid flows, is still feeling the effects of the large-scale theft of public funds uncovered in 2013.

    The scandal, known as “cashgate,” prompted donors to suspend all budget support, forcing the government to print money to cover the deficit. A poor maize harvest caused by heavy floods and drought in early 2015 has exacerbated the problem by raising food prices and pushing inflation up further.

    “If left unaddressed, inflation will become entrenched, continue to hurt investment and growth, and worsen living conditions, especially for the poor,” the study said.

    Economic reforms bear fruit 

    But despite Malawi’s challenges, the report lauded bold economic reforms undertaken in mid-2012 that greatly improved the economy’s resilience. Devaluing the Kwacha, adopting a floating exchange rate regime, the liberalization of the foreign exchange market, and the introduction of an automatic fuel price adjustment mechanism have helped increase the country’s foreign exchange reserves from one month of import cover to over 3 months.

    The report also acknowledged significant progress in the social sector such as 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.

    The report noted, however, that high inflation is hampering real GDP growth, which averaged only 4 percent during 2012–15 and significantly below the 7 percent targeted under Malawi’s Growth and Development Strategy.

    Fiscal, financial sectors interlinked

    Inadequate fiscal adjustment following the “cashgate” scandal affected the financial sector through several channels, the report said. Non-performing loans, for one, increased due to the accumulation of domestic payment arrears to private...

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