The Malawi Nation paper's review of the economic talk in malawi

http://www.mwnation.com/business-news-the-nation/business-review/13300-in-search-of-keys-to-malawi-ailing-economy In search of keys to Malawi ailing economy Category: Business ReviewWritten by INNOCENT HELEMA. Agriculture remains the mainstay of the Malawi economy Malawi’s macroeconomic indicators; inflation, gross domestic product (GDP) and foreign exchange reserves are all in the red. This is certainly bad news for businesses and consumers. There have, however, been efforts by government such as the Economic Recovery Plan (ERP) to be implemented over 18 months with specific reforms on monetary policy, but experts have so far argued that this might be futile. The ERP, launched about two months ago, sets targets on inflation rate to single digit, import cover to the internationally recommended three months and annual growth rate of 5.7 percent by December 2013. In the long term, however, the ERP focuses on five sectors of energy, tourism, mining, agriculture, transport infrastructure and ICT to reset the economy. The recovery plan identifies areas for intervention in the immediate, short and medium term. Some of the measures include the devaluation of the kwacha and the setting of a market-determined exchange rate which have already taken place. The ERP says it is imperative to tighten monetary policy by increasing the cost of credit and mopping up excess liquidity. However, economist Dr Greenwell Matchaya, in his article last month, argued that unless well planned, depreciation [of the kwacha] could lead to further depreciations and inflation rise. Monetary policy He wondered whether monetary policy implementation under the ERP would not worsen the situation, arguing that government should bear in mind that an ailing economy such as Malawi’s, needs a good climate for investment. Matchaya cautioned that the ERP’s use of lending rates to mop up excess liquidity in an economy may worsen the situation further. He said Malawi needs low interest rates that could encourage investors to borrow for production and in the process, create the much-needed jobs; hence, increasing exports in the medium term. Inflation in October, according to the National Statistical office (NSO), hit a high of 30.6 percent up from 28.3 percent the previous month while urban inflation settled at 33.6 percent. Since January to October this year, inflation has risen by a margin of about 200 percent from 10.3 percent to 30.6 percent in October, a huge corrosion in the purchasing power of both consumers and businesses. Based on NSO inflation figures, the average rate for the 10 months stands at 18.85 percent, a few points above the projected 18.4 percent target for this year as announced by the Minister of Finance Dr Ken Lipenga in 2012/13 budget in June this year. Certainly, with food prices going up, a basket that contributes 58.1 percent to Consumer Price Index (CPI) coupled with fuel prices increasing every month against a free-falling kwacha, Malawians should not expect a slowdown in inflation anytime soon. The combination of high inflation and the current ‘prohibitive’ interest rates could also hit hard the private sector and hard pressed households with the resultant cost of borrowing likely going to push the economy into a recession. Inflationary pressure Recently, the Reserve Bank of Malawi (RBM) Governor Charles Chuka expressed concern about the unrelenting inflationary pressure. He told a joint IMF Malawi Government conference in Lilongwe that despite the slowdown in money supply circulation, rising inflation rate is a concern for monetary policy. The recent GDP growth rate projection is at 1.9 percent, according to the IMF, a downward adjustment from the initial 4.3 percent as envisaged in the budget. The recent report by Nico Asset Managers Limited for week ending November 23 2012 says gross foreign exchange reserves stood at $336 million (K11 billion), an equivalent of 1.79 months worth of import cover as compared to $340 million (K11.2 billion) an equivalent of 1.81 months of import cover the previous week. The report further said the kwacha depreciated by 0.39 percent in the same week to K324.68 from K323.42 to the dollar. Economy in bad shape Experts say the low foreign exchange reserves could cripple the implementation of the ERP which needs a strong forex base to support private sector-led growth. Economics Association of Malawi (Ecama) executive director Nelson Mkandawire said on Sunday the Malawi economy is in bad shape. “[To come out of this problem] Malawi should concentrate on crops that generate foreign exchange. This means that we must change focus of the Farm Input Subsidy Programme (Fisp) to emphasise crops such as legumes that will see us earn foreign exchange and boost our reserves,” he said. Currently, Malawi spends more than K40 billion on Fisp which is essentially on maize subsidy and this is an annual expenditure on consumption, he said. “We must reduce spending too much on consumption and must focus on investment and forex-generating crops,” said Mkandawire On its part, the Indigenous Business Association of Malawi (Ibam) interim president Mike Mlombwa: “With constant changes in fuel prices almost every month, planning is becoming difficult and we suggest that this must be stabilised. Government is the biggest buyer and we suggest that it must give preference to indigenous Malawians when awarding contracts,” he suggested. Government must ensure that local businesses are empowered so that they create wealth and employment, he added. Mlombwa cited the country’s regional neighbours such as Zambia, Zimbabwe and South Africa where, he said, they have deliberate policies to empower locals.