Reserve Bank of Malawi targets one-digit inflation in two years

The Reserve Bank of Malawi (RBM) says it has set its target of achieving six months import cover and single digit inflation by 2018. The development comes at a time when the country is struggling to maintain the internationally accepted three months cover for imports.

In its Monetary Policy Statement issued on Wednesday titled “Containing second round effects from food inflation and managing expectations,’ RBM said attaining this objective implies that headline inflation should broadly move in line with the bank forecasts.

“The single digit inflation is achievable if inflation outturn for December 2016 does not diverge significantly from the 25.4 percent projection. Authorities have also taken note that the current outturn has been exacerbated by high food inflation and this will continue to weigh negatively on the outlook for overall inflation especially in the second half of 2016,” reads the statement signed by RBM Governor, Charles Chuka.

This, according to RBM, calls for a continued tight monetary policy in order to achieve the targeted rate of inflation. To this end, the bank has said it will ensure that the policy rate remains above overall inflation.

On forex, RBM says it will aim at maintaining foreign exchange reserve coverage of at least three months of imports up to June 2017.

“In the long run to 2018, the bank aims at attaining six months of import coverage in line with the Southern Africa Development Community convergence criteria,” says Chuka.

The RBM chief was quick to note that there are many challenges to monetary policy implementation going forward.

“The tobacco market in 2016 is relatively subdued in terms of both prices and volumes when compared to last year. This points to increased pressure on the exchange rate and reserves in the next six months.

“The situation might worsen after the close of the tobacco season. However, with the successful review of the implementation of the Extended Credit Facility and the subsequent disbursement of $76.8 million, as approved by the International Monetary Fund Board, it is hoped that this may cushion foreign exchange reserves position,” said Chuka.

He further observed that exchange rate volatility has also subsided during the second half of 2016.

The bank further noted that it will also intensify its communication on monetary policy issues to ensure well informed decision making process by market players in order to manage and contain inflationary pressures.

“This, supported by timely and efficient management of the food situation, as well as exercising prudence in government expenditure should help in ensuring a declining inflation trajectory into 2017,” Chuka said.