By Burnett Munthali

Introduction

Businesses in Malawi have lamented inflation and heavy taxation to President Chakwera. Determinants of headline inflation. Malawi’s economy is dominated by rain-fed agriculture which accounts for 30 percent of GDP, and food inflation displays strong seasonal patterns. By contrast, nonfood inflation has been influenced by factors, such as import prices and the exchange rate.

The main challenge

Inflation shifts people into higher tax brackets, which typically have higher tax rates, and erodes the value of the tax-free personal allowance (and any other allowances or deductions). So real taxes paid increase, and also the marginal rate. This is known as bracket creep.

Inflation also distorts reported income when the costs of fixed assets are charged to income through depreciation. The increased costs of replacing fixed assets are not reflected in the depreciation charge.

It includes charges placed by the government on goods/income. For example, VAT is a tax which means consumers have to pay an additional 20% of the price in the form of tax which goes to the government. Inflation means a rise in living costs – a rise in the price of living. It is measured by Consumer Price Index (CPI).

Monetary policy primarily involves changing interest rates to control inflation. Governments through fiscal policy, however, can assist in fighting inflation. Governments can reduce spending and increase taxes as a way to help reduce inflation.

In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

Ways Inflation Hurts Consumers and the Economy

Less Purchasing Power. The most obvious impact of inflation is that it hurts your purchasing power. Less savings. Loss of goods and services.

Inflation can lead to hidden gains or losses in financial statements. Assets that appreciate with inflation, such as real estate, may appear more profitable on paper than they actually are. Conversely, assets like cash may lose real value over time.

Industries feeling the pressure

Industries feeling the pressure include wholesale trade, construction, food other services transportation and accommodations.

Inflation allows borrowers to pay lenders back with money worth less than when it was originally borrowed, which benefits borrowers. When inflation causes higher prices, the demand for credit increases, raising interest rates, which benefits lenders.

Positive and negative effects of inflation is that it encourages spending in anticipation of rising prices, which can lead to higher wages and growth in the economy. But inflation can also degrade the value of people’s savings, fixed income investment returns, and can lead to a decrease in global competition for a country.

But when the rate of inflation rises rapidly, it can result in lower purchasing power, higher interest rates, slower economic growth and other negative economic effects.

Conclusion

Malawi Consumer Price Indices Dashboard. The year on year inflation rate for January 2024 is at 35.0 percent, an increase from the 34.5 percent recorded in December 2023. Food and Non-Food inflation rates are at 44.9 percent and 22.0 percent, respectively.

Corporate Tax Rate in Malawi is expected to reach 30.00 percent by the end of 2024, according to Trading Economics global macro models and analysts expectations. In the long-term, the Malawi Corporate Tax Rate is projected to trend around 30.00 percent in 2025, according to our econometric models.

According to the Minister, effective April 1 2024, the zero pay as you earn (Paye) bracket will be increased from K100 000 to K150 000. Accordingly, the next K350 000 will be taxed at 25 percent while the next K2 050 000 will be taxed at 30 percent and K2 550 000 will be taxed at 35 percent.