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World Bank tips Mw, others on cushioning price rises

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By Justin Mkweu

The World Bank has advised emerging markets and developing economies (EMDEs) and low income countries (LICs), such as Malawi, to concentrate on diversification and other import substitution means to cushion their citizens from global price fluctuations.

The recommendations are included in the Global Economic Prospects for 2022 released by the Bretton Woods institution last week. The report notes that prices of commodities have sharply risen between 2020 and 2021 and the impact has been heavy on EMDEs and LICs that heavily depend on imports from developed countries.

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The World Bank says EMDEs and LICs generally need to take policy steps to place them on a firmer footing to manage future commodity price shocks, including those stemming from the energy transition and the effects of climate change on weather patterns.

“Countries can adjust their fiscal, monetary and macro prudential policy frameworks to cushion the impacts of commodity price movements. They can also take structural policy measures to reduce reliance on commodities by encouraging diversification of exports and national asset portfolios, and reducing distortions arising from subsidies,” the report reads.

Other reports from the institution and the International Monitary Fund show that prices of commodities such as fuel and fertiliser sharply rose due to strong resurgence of demand and unusually widespread supply bottlenecks.

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The effects of such increases were felt locally. For example, the Consumers Association of Malawi (Cama) reported an average 58.2 percent rise in commodity prices between October 2020 and November 2021.

Minister of Trade Sosten Gwengwe agreed with the institution, saying the government understands the importance of diversification and import substitution to cushion rising prices and grow the economy.

Gwengwe said the government is making steps on diversification by promoting cannabis cultivation, legumes farming and regulated mining, among others, to help stakeholders move from exporting traditional agricultural products.

“…beyond that we are putting emphasis on manufacturing and value addition because that is the best way to deal with issues of import substitution and that is complemented by the National Export Strategy II (NES II) which has value addition and manufacturing as part of the three priority areas,” Gwengwe added.

University of Malawi-based economist Exley Silumbu believes the diversification and import substitution is long overdue and what is required, is to remove bottlenecks that slows it.

He, however, advised the authorities to look carefully into strategies because strategies such as import substitution have proved futile in other developed countries.

“Countries are no longer focusing on import substitution because it has proved difficult as you still need to import intermediary goods but manufacturing goods for the export market is the answer to such fluctuations,” Silumbu said.

Malawi has a narrow export base dominated by raw agriculture products despite having a huge appetite for imported products.

An annual economic report for 2021 published by the Ministry of Finance indicates that, in 2020, exports decreased by 36 percent to $730 million from the $1,150 million that was recorded in 2019.

The performance is largely attributed to effects of Covid which affected returns from the country’s major exports such as tobacco, which dropped by 20 percent, sugar dropped by 9.7 percent, coffee and tea dropped by 6 percent.

The decrease was equally experienced on imports which saw a 6 percent drop from $3,053 million to $2,052 million that was recorded in 2019. These developments saw Malawi’s merchandise trade balance souring to $2,052 million, representing a 7 percent increase from $1,903 million, which is the highest in the last nine years.

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