By Twink Jones Gadama
BLANTYRE-(MaraviPost)-Malawi is grappling with a severe inflation crisis, with prices escalating rapidly, prompting the World Bank to recommend a two-pronged approach to mitigate the situation.
The Bretton Woods institution suggests addressing supply-side constraints, particularly in the agriculture sector, and controlling the growth of money supply to rein in inflation.
In its latest Malawi Economic Monitor report, the World Bank notes that supply-side constraints are driving inflation, with the agriculture sector being a significant contributor.
The report observes that food inflation, which dropped from a peak of 44.9% in January to 41.5% in June, will continue to exert pressure on prices in the short to medium term.
To address this, the World Bank recommends that the government tackle food supply issues through timely purchases of grain for strategic reserves or imports.
Additionally, the report cautions that the rapid growth of money supply has the potential to worsen inflationary pressures in the short to medium term.
The World Bank’s assertions come as the Reserve Bank of Malawi’s tight monetary policy has failed to contain inflation.
Despite raising the policy rate by 1,400 basis points since 2020, inflation remains above 30%, nearly six times the desired 5% mark.
Economists agree that money supply growth will exacerbate inflationary pressures.
“High money supply exerts inflationary pressure on both the demand and supply sides,” said Economics Association of Malawi acting president Bertha Bangara-Chikadza.
However, some experts argue that the World Bank’s suggestions may not be entirely effective in the Malawian context.
“The success of these measures depends on various factors specific to the Malawi economy, including exogenous shocks affecting the agriculture sector,” said Bangara-Chikadza.
Others believe that addressing supply-side factors can ease shortages and controlling money supply growth can manage demand-pull inflation.
“However, its success relies heavily on proper implementation and government management amid external pressures,” said Catholic University of Malawi economics lecturer Derrick Thomo.
To boost productivity in the agriculture sector, experts recommend promoting irrigation to mitigate climate shocks and improving soil health through integrated soil fertility management.
“We should also revamp our extension service to reduce the farmer-to-extension worker ratio,” said Mwapata Institute executive director William Chadza.
As the Reserve Bank of Malawi’s Monetary Policy Committee meets to deliberate on the economic performance and decide on the direction of the policy rate, the World Bank’s recommendations offer a timely intervention.
With inflation remaining stubbornly high, it is crucial for policymakers to adopt a multi-faceted approach to address the root causes of inflation and restore economic stability.