Malawians are on course to have more money in their pockets as the rise in average prices slacken, the cost of borrowing falls and the economy readies for a 6 to 7 percent surge this year.
The projected growth in gross domestic product (GDP) for 2018 is more than the 6 percent pace that the World Bank says is needed to meaningful reduce poverty. It is also way above the country’s annual population growth rate of around 3 percent, which should lead to a jump in individual income or per capita earnings – calculated by dividing the GDP, adjusted for inflation, by the total population.
The improved macroeconomic situation and outlook is culmination of a broader goal laid out in the Peter Mutharika administration’s first budget in 2014 to stabilise the macroeconomic environment as a launch pad for growth and poverty reduction.
Thus, the administration prioritised slowing price hikes through an inflation taming strategy built around maize availability at affordable prices and fiscal frugality.
That plan has resulted in inflation falling by around 67 percent from – according to the National Statistical Office-21.5 percent in June 2014 to the current 7.1 percent, largely thanks to a slowdown in food prices and restrained government spending.
“Food prices, which have been on the decline, coupled with prudent fiscal management, have helped to ensure that inflation is on the downward slope”, says the Reserve Bank of Malawi (RBM) spokesperson Mbane Ngwira.
Food has a 50.1 percent weight in the consumer price index (CPI)-which measures changes in the price level of people’s shopping basket.
Nipping food security risk
With the dry spells, fall armyworms and floods ravaging the country, the improved inflation situation should have been under threat. But government appears to have prepared for that eventuality in order to safeguard what Finance, Economic Planning and Development Minister Goodall Gondwe calls the “hard won macroeconomic stability and the economic rebound.
To date, government has 272,000 tonnes of maize in reserves comprising 90,000 metric tonnes that Admarc did not sell last year and 182,000 tonnes that the National Reserve Agency (NFRA) bought.
This is apart from the estimated 68,000 tonnes of maize that government said is available around the country.
To enforce the food security safety net, Gondwe announced in the Mid-Year Budget Review statement last Friday that government has also set aside money for NFRA and Admarc to buy an additional 200,000 metric tonnes of maize immediately.
The well-stocked reserves plus this season’s harvest-even if it were lower than last year due to natural disasters-nips in the bud inflation risks, keeps food prices at bay, sustain single digit inflation levels and maintain macroeconomic stability.
How inflation helps you
The drop in inflation has resulted in a 36 percent plunge in the central bank’s policy rate from 25 percent in June 2014 to 16 percent lately. This has lowered the cost of borrowing for individuals and organisations, leaving them with savings to spend, invest, create new jobs and improve families’ well-being.
The policy rate or what used to be called the bank rate is the percentage cost that commercial banks pay to borrow from RBM and is a benchmark for setting interest rates by lending institutions.
When the policy rate stood at 25 percent nearly four years ago, banks’ lending rates ranged from 35 to 40 percent, which according to the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) was prohibitive.
“When interest rates were around 35 percent, it became difficult for businesses to borrow for productive purpose. The private sector, which is the engine of economic growth, needs affordable credit to boost its operations. High interest rates crowd out the private sector”, explains Hope Chavula, MCCCI’s public-private dialogue coordinator.
The situation has improved dramatically now.
Under the Mutharika administration, the central bank has been cutting the policy rate as inflation eased. The policy rate has fallen to 16 percent, allowing banks to peg their lending rates to between 23 and 25 percent; thereby providing cheaper loans to individuals and firms.
“As the situation is now, with lending rates at about 25 percent, the private sector is a little bit relieved though we feel more could have been done to make capital cheaper”, says Chavula.
Consumer rights activist John Kapito weighs in, stressing that lower interest rates have relieved individual borrowers as well.
Investment advisory firm Nico Asset Managers expects the monetary police rate to remain at 16 percent in the short term. But the firm hints that there is potential for the cost of borrowing to fall even further should government maintain low inflation rate as is expected.
Reserves pile up
Another indicator that the economy has picked up steam is the growth in foreign currency reserves. Compared to June 2014, imports cover – the ration of a country’s imports to its total foreign exchange reserves-a combination of gross official and private sector buffer-were recorded at $761 million or 3.98 months of import cover.
In comparison to February, 2018, RBM figures show that reserves are at $1 billion or 5.15 months of import cover, one of the strongest cushions in recent memory.
RBM Governor Dalitso Kabambe is confident that monetary authorities will maintain a robust reserves position.
“We appear to be exporting more not just tobacco. For instance, in 2016, we exported pulses (edible seeds of plants in the legumes family) in excess of $100 million. The other foreign exchange is coming from tea, sugar, groundnuts and other legumes.
“The way we project ourselves at Reserve Bank, we will continue to have an import cover of above three months; we will continue to have a stability in the Kwacha”, he says.
But maintaining a tight monetary policy stance is crucial to avoiding sliding back, according to Blantyre-based economist Colleen Kalua.
“The RBM need not waver on its tight monetary policy stance to maintain the path that inflation, import cover and exchange rate have taken” he says.
The macroeconomic stability appears to have created a fertile ground for economic growth, with GDP this year projected to be the highest in at least five years.
Capital Hill and the International Monetary Fund expect economic growth rate to nestle between six and seven percent.
In the first year in office, the Mutharika administration presided over a GDP growth rate of 5.7 percent in 2014, according to RBM figures.
But droughts and floods reversed the gains in the following two years-2015 and 2016-chalk-ing just 2.9 percent and 2.7 percent respectively that helped the country elude a recession the devastation of the agriculture sector could have brought.
But with bumper harvest in 2017 and in spite of power problems, the recovery got under way last year as growth was estimated to be in the three to five percent range.
With growth projected to be around seven percent in 2018, it could confirm a rebound reminiscent of the Bingu wa Mutharika days when the Democratic Progressive Party presided over an unprecedented economic revival that saw GDP growth averaging seven percent per annum over a four-year period.
Is history about to repeat itself under Peter Mutharika’s DPP? They say only time will tell.
But Catholic University’s economics lecturer Gilbert Kachamba believes that with falling inflation, plunging interest rates, a stable Kwacha, progressive fiscal policy and the new dawn of reliable power supply, the country may not have to wait for tales from time: high growth rates may be unstoppable under the Mutharika administration.