The International Monetary Fund (IMF) has advised Malawi and other countries to prioritise the most vulnerable sections of the society in responding to high food and energy prices.
This comes as commodity prices continue to sour across the globe due to the Russia Ukraine war, a situation feared to cause a global food supply crisis.
Already, the World Trade Organisation fears that African countries could be hit especially hard by wheat and fertiliser shortages as millions of tonnes of grain are sitting in warehouses and Ukrainian ports unable to be exported due to the war.
In a blog, IMF economists David Amaglobeli, Emine Hanedar, Gee Hee Hong, and Céline Thévenot say governments tried to limit the rise in domestic prices as international prices increased, either by cutting taxes or providing direct price subsidies.
“But such support measures in turn create new pressures on budgets already strained by the pandemic. Limiting the price pass-through is not always the best approach,” they say.
According to a new IMF note, policymakers should allow high global prices to pass through to the domestic economy while protecting vulnerable households affected by the increases.
It says this is ultimately less costly than keeping prices artificially low for all, irrespective of their ability to pay.
However, he fund’s findings show that not all countries are able to follow the same path.
“Where subsidies exist, the pacing of price adjustments and the extent to which social safety nets are used will differ from country to country. That’s why our note offers nuanced policy advice for countries depending on individual country circumstances, such as the strength of the social safety net, the level of existing food and fuel subsidies and the availability of fiscal space,” reads the blog post.
In Malawi, where commodity prices have been on an upward spiral in the recent past, headline inflation went up to 14.7 percent in May 2022.
Pressure continues to mount in the aftermath of a 25 percent devaluation of the local currency, the Kwacha.
The measures include cutting by 20 percent fuel allowances for his Cabinet, restrictions on foreign travel to a maximum of three trips per year and restrictions on the movement of government pool vehicles after 6pm. The measures also include public officers only flying economy class.