By Kingsley Jasi:
The Reserve Bank of Malawi (RBM) stands in between hope and worry as its annual headline inflation projection is under intense pressure emanating from a growing deficit and other factors.
The central bank says this is why loosening monetary policy would be risky when there is a higher risk of inflation triggers.
Among the risks is money supply growth driven by 81 percent growth in fiscal deficit year-on-year.
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The first quarter of the current fiscal year registered a K662 billion deficit, driven by 35.5 percent expenditure growth, which offset the 18.7 percent revenue growth in the quarter.
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This came out from a monetary policy technical committee forum in Lilongwe on Monday, when insights of the recent MPC decisions were shared.
Statistics show that money supply growth in the second quarter of this financial year, fiscal deficit which is above budget, and the continued depletion of foreign reserves blur the outlook despite the central bank’s optimism.
The central bank says persistent fiscal pressure highlights the need for comprehensive consolidation measures.
RBM Director of Financial Markets Chakudza Linje said engagements with fiscal authorities were ongoing for the implementation of containment measures.
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“Fiscal pressure is obviously emanating from the increase in the levels of fiscal deficit. We are in discussions with our colleagues from the Ministry of Finance to see how best fiscal consolidation can happen to contain the levels of fiscal deficit,” she said.
The increased deficit is said to have contributed to the money supply growth registered at 45.8 percent in the second quarter, higher than the 42.6 percent in the corresponding quarter last year.
However, the central bank draws confidence from the outturn of inflation in the quarter. It was captured at 28.5 percent, which is lower than 32.8 percent registered during the corresponding period last year.
With market players expecting inflation to hit 32.4 percent by December, the MPC report is a bit conservative as it draws confidence in the lower rates than last year at this time and expects a protracted and gradual easing that is already above earlier projection.
Economics Association of Malawi Executive Director Esmie Kanyumbu commended the central bank for being cautious by maintaining a high policy rate.
She, however, asked for coordination between fiscal and monetary authorities.
“From the fiscal authorities, we would recommend some cuts in expenditure, which is also fuelling inflation, but also coordination by the two authorities to channel resources towards growth and export-oriented sectors,” she said.
The recent MPC report maintained the policy rate at 26 percent and further left all other monetary policy instruments unchanged, a tight monetary policy stance that is apparently unsure of the continued easing of inflation that has been on the decelerating path for the past four consecutive months.
