Inflation—the rate of change in commodity prices over a given period of time—registered a mixed performance in 2024.
It has been seen rocketing to a record high level in the past decade, but with some signs of moderation in the past two months.
As at January 2024, headline inflation stood at 35 percent.
This was the first time inflation was recorded at such a high rate since April 2013, when it was recorded at 35.8 percent.
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The economy faced myriad challenges throughout the year. And during the first 10 months, headline inflation remained stubbornly high, above 31 percent.
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It averaged 33.29 percent.
The persistence of high inflation during the period reflects broader economic challenges, including the impact of the 44 percent Kwacha devaluation in November 2023, global supply chain disruptions and domestic food supply challenges.
However, there was a silver lining as the inflation rate gradually decreased to 27 percent in November. This downward trend, though slow, signals some relief in the economic landscape.
Food inflation, a critical component affecting household welfare, has been the main driver of overall inflation.
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It reached its highest point of 43.5 percent in September 2024, before moderating to 33.7 percent in November 2024.
This remains significantly higher than the 41.7 percent recorded in November 2023.
The non-food inflation component has shown more stability, though still at concerning levels.
From 22.2 percent in November 2023, it decreased slightly to 17.2 percent by November 2024, suggesting some easing in price pressures outside the food sector.
Authorities and economic experts have, on numerous occasions, attributed the performance in non-food inflation to the Reserve Bank of Malawi (RBM)’s monetary policy stance.
RBM maintained a tight monetary policy stance, with the policy rate held at 26 percent for most part of the year.
This high policy rate was intended to curb inflation by reducing excess liquidity in the market and encouraging savings over spending.
The tight monetary policy had mixed effects on different sectors of the economy.
While it succeeded in stabilising non-food inflation, it also led to higher borrowing costs, which potentially stifled economic growth and investment.
Businesses and consumers faced higher interest rates on loans, which may have dampened spending and investment activities.
Such developments in inflation also reflected in the cost of living for Malawians and residents of Malawi.
A recent cost of living analysis by Employers Consultative Association of Malawi (Ecam) shows that the cost of living for a household of six members reached K663, 204 in November.
This represents an 18.8 percent jump from K558,200 at the end of January 2024 and a 4.17 percent increase from K636,634 in October.
According to the Ecam report, food prices went up by 5.99 percent in October 2024.
But the price of maize remained constant at K45,000 per 50-kilogramme bag.
On the other hand, the overall price for non-food items increased by an average of 1.26 percent from K163,169 in October 2024 to K165,220 in November.
Furthermore, economic experts noted that the annual growth rate of broad money (M2) wielded a perpetually worrisome high, at 48.8 percent, during the third quarter of 2024.
There was also a tight monetary policy in the form of increased Liquidity Reserve Ratio (LRR) relative to second quarter statistics—42.6 percent and 33 percent in the corresponding period in 2023, representing a staggering 47.88 percent annual growth rate and15.8 percent in real terms.
Malawian broad money grows mainly due to the untamed growth in demand and term deposits, especially at the end of the tobacco season, where foreign currency is traded for local currency through commercial banks and, thus, cannot be contained by the forces of contractionary monetary policy.
When rates are higher, people are more likely to lock their funds into longer-term deposits or higher-yielding accounts, providing banks with greater stability.
However, the duration is determined by the needs of the agricultural cycle.
These attributes of money experienced a year-on-year increase of K607.8 billion and K567.7 billion, respectively, which was on account of the bumper tobacco trading season as well as the contributory factor of currency depreciation— which is another aspect of the contractionary stance set forth.
This explains the offsetting effect which would have been rather expansionary in other cases.
In terms of LRR increases, the lag effect for monetary policy will begin to pass through, beginning with the fourth quarter at the earliest, as the pass-through mechanism is not instantaneous.
It has to be known that RBM is hamstringing itself in the fight against runway broad money by placing the LRR at the bare minimum around 10 percent. In order to tame monetary growth, seasonal variations have to be taken into consideration.
Looking ahead to 2025, the inflation trends observed in 2024 present both challenges and opportunities for Malawi’s economy. The persistent high food inflation remains a critical issue that needs to be addressed to ensure food security and economic stability.
Efforts to improve agricultural productivity, enhance supply chain resilience and mitigate the impacts of global commodity price fluctuations will be essential in tackling food inflation.
On the other hand, the overall downward trend in inflation provides a glimmer of hope.
If this trend continues into 2025, it could signal a period of economic stabilisation and recovery.
RBM’s commitment to maintaining a tight monetary policy will be crucial in achieving this goal.
However, there may also be a need to strike a balance between controlling inflation and fostering economic growth.
Lowering the policy rate slightly, while still keeping inflation in check, could stimulate investment and consumption, thereby driving economic growth.
