Malawi’s inflation outlook worsens due to domestic shocks—RBM Governor

The Monetary Policy Committee of the Reserve Bank of Malawi (RBM) — which meets quarterly to review recent economic developments and decide on the monetary policy stance, has disclosed that the “inflation outlook has worsened” since its last meeting — “mainly due to unforeseen domestic shocks”.

RBM Governor, Dr Wilson T. Banda, who is chairperson of the committee, reports that at its second meeting held on April 26-27, the policy rate was raised to 22.0% and the liquidity reserve requirement (LRR) ratio on domestic currency deposits to 5.75%.

He said the unforeseen domestic shocks in particular are the Cyclone Freddy-induced flood disaster in Southern Region of the country and localised drought in North that “had worsened the food supply prospects and strengthened adverse supply-side inflationary pressures”.

“The Committee also observed that the need to rehabilitate the infrastructure damaged by the cyclone has the adverse impact of amplifying aggregate demand and fuelling inflation — requiring further tightening of monetary policy to dampen the demand effects.

“In view of these developments, the Committee resolved to increase the policy rate by 400 basis points to 22.0% and the LRR ratio on domestic currency deposits by 200 basis points to 5.75%.

“However, the LRR ratio on foreign currency deposits and the Lombard rate were maintained at 3.75% and 20 basis points above the Policy rate, respectively.”

On the global real output growth to moderate in 2023, the Governor said the

Committee noted that “global growth is expected to remain subdued”.

“The IMF World Economic Outlook (WEO) released in April 2023 projects a slowdown in global real output growth to 2.8% in 2023 from 3.4% in 2022. The 2023 growth forecast is also 0.1 percentage point below the initial projection presented in the January 2023 WEO.

“The moderation reflects largely the impact of continued tight monetary and financial conditions, particularly in the advanced economies.

“In 2024, global real output growth could rebound to 3.0%, as the tight global financial conditions are expected to dissipate.”

The Governor further reported that they observed that “the advanced economies are the most adversely affected, as their projected real output growth of 1.3% for 2023 is over half below the 2.7% achieved in 2022 — albeit 0.1 percentage point higher than the January 2023 WEO forecast”.

“The modest growth in 2023 is not surprising considering that central banks in these economies have generally been the most aggressive in the fight against inflation through tight monetary policy. For 2024, growth in advanced economies is projected at 1.4%.

“Meanwhile, emerging markets and developing economies are also projected to register a slightly lower output growth of 3.9% in 2023 compared to 4.0% for 2022, but could strengthen to 4.2% in 2024.

“Growth in all the sub-regions has been revised downwards except for the Emerging and Developing Asia where growth has been maintained at the January 2023 WEO forecast of 5.3%.

“In the Sub-Saharan Africa region, the 2023 growth is projected at 3.6% — a slowdown from 3.9% in 2022 and the January 2023 WEO forecast of 3.8%, but could recover to 4.2% in 2024.

“The moderation in 2023 largely reflects the impact of funding challenges following

the prevalence of tight financial conditions, in addition to deteriorating terms of trade against the region’s member states.”

Global inflation to decelerate in 2023

The Governor says global energy and food prices continue to decline, saying this — coupled with the weakening of aggregate demand on account of prolonged tight monetary and financial conditions — is expected to lead to disinflation in 2023.

“As reported in the IMF’s April 2023 WEO, disinflation of 7.0% is forecast for 2023, from 8.7% in 2022. However, the 7.0% represents an upward revision from 6.6% projected in the January 2023 WEO.

“The revision follows the observation that core inflation is sticky and yet to peak. With the fight against inflation amid declining global commodity prices expected to continue, inflation could decline to 4.9% in 2024.

Domestic economic growth to be modest

The Governor reported that the Committee observed that “prospects of the 2023 domestic economic recovery faces some headwinds, such that the 2.7% growth for 2023 is likely to be revised downwards”.

“This follows the impact of the Cyclone Freddy and localised drought which are expected to yield a lower-than-initially projected agricultural output, in addition to the impact of limited access to fertilizers during the 2022/23 crop production season; and prolonged electricity power cuts at the beginning of 2023 as well as protracted foreign exchange supply shortages which are expected to dampen non-agricultural output.

On merchandise trade, the MPC noted that “preliminary statistics from the National Statistics Office indicate that the trade deficit widened to US$283.5 million during 2023Q1, from a deficit of US$15.7 million during 2022Q4, but was narrower than a deficit of US$388.2 million for 2022Q1”.

“Meanwhile, the reopening of main markets for the country’s major exports in 2023Q2, is expected to improve export inflows during that period.

Exchange rate pressures to persist

He also reported on challenges faced due to forex, saying: “Malawi kwacha/US Dollar TT exchange rate remained relatively stable and closed 2023Q1 at K1,033.80 per US dollar.

“The stability against the US dollar allowed the local currency to replicate the latter’s performance against other key currencies.

“Notably, the kwacha lost 2.6% (MK32.72) against the British pound and 2.3% (MK25.74) against the Euro, but gained 4.7 percent (MK1.96) against the South African rand.

“Meanwhile, the Bureaux Malawi kwacha/US dollar cash exchange rate registered a depreciation of 4.5 percent and traded at K1,491.98 per US Dollar at the end of 2023Q1.”

The domestic inflationary pressures is also expected to persist and the Governor said they noted that “headline inflation averaged higher at 26.5% in 2023Q1 than 26.0% for 2022Q4 and compared to 12.1% for 2022Q1”.

“Food inflation declined to 31.5% from 33.1% in 2022Q4, partly reflecting the impact of opening of some of ADMARC’s maize markets, which helped to stabilise prices during 2023Q1.

“In addition, the seasonal increase in the supply of vegetables during review period, which constitutes about 12.0% of the food basket, further contributed to the moderating food price pressures.

“The above notwithstanding, pressures mounted on non-food inflation, as evidenced by the increase to 20.4% in 2023Q1 from 18.3% in the previous quarter.

“The sources were high costs of items under the transportation, hospitality services, as well as alcohol and tobacco categories.”

On the outlook, the Governor said they noted that the onset of the food crop harvesting period in 2023Q2 “will likely result in a slowdown in food inflation during the quarter”.

“However, considering the relatively lower food crop size, the lean period would set in earlier than normal. The Committee further observed that the optimism that the declining commodity prices would translate into a non-food disinflation was no longer realistic in the face of heightened demand-side inflationary pressures arising from fiscal risks and second-round effects of the cyclone, in addition to exchange rate pressures.

“The foregoing has changed the earlier prospects of disinflation in 2023. Instead, headline inflation is projected to average higher at 24.5% in 2023 than 18.2% projected during the previous MPC meeting and compared to 20.9% for 2022.”

On the Committee’s consideration and decision, the Governor reports that inflation is set to remain elevated in 2023, “as the risks which emerged during the review quarter fuelled both adverse supply-side and heightened demand-side inflationary pressures”.

“The Committee observed that such a high inflationary environment is not conducive for economic growth — thus the decision to address inflationary pressures by increasing the Policy rate by; the LRR ratio on local currency deposits but maintaining the LRR ratio on foreign currency deposits and the Lombard rate.

“The Committee acknowledges that to address the prevailing economic challenges and restore macroeconomic stability, monetary policy actions alone are not sufficient — monetary policy needs to be complemented by supportive fiscal policy.”

The next MPC meeting is scheduled for July 26 and 27 July 2023 with its decision to be be announced on the 27, said the Governor.

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