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Subsidy can drive down inflation—economists
By
Ephraim Munthali - 22-08-2002 |
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Food basket dictates inflation
Economists have hailed the pledge by the International Monetary Fund (IMF) to facilitate maize imports in the wake of food shortage, saying the funds could enable Malawi achieve its five percent inflation target by December.
Economic Association of Malawi (Ecama) public relations officer Osten Chulu said in an interview on Wednesday the country’s inflation rate—currently at 16.1 percent—is mainly dictated by the food basket, especially maize.
He said the availability of the staple food could maintain a downward adjustment in the inflation.
“This is a very crucial time for the government because about 65 percent of the country’s inflation is driven by the food index. Out of 65 percent, 55 percent is maize. With the acute food shortage that has hit the country, we agree with the Reserve Bank of Malawi (RBM) that it is almost impossible to achieve the five percent target,” said Chulu.
The National Statistical Office (NSO) yesterday said in its July report that for the first time this year the food index has shown an increase as compared to the past six months.
The annual inflation rate, however, has continued to slide steadily every month with year ending July declining by 0.6 percentage points to 16.1 percent from 16.7 percent in June this year.
The downward month to month trend has been attributed mainly to seasonal price decrease in most cereals and cereal products and starch items in most parts of the country.
The Reserve Bank of Malawi said last week that although the bank was confident that the five percent [core inflation] target was achievable given the current downward trend, the path is not clear enough due to the present food crisis in the country.
Chulu said one way government can achieve its inflation target is to flood the market with a lot of maize through bulk buying.
He said bulk buying may enable government to buy maize at a cheaper price and, therefore, sell to the people at an equally cheap price without subsidies.
Chulu, however, said this alternative would force government to borrow locally, a move that may have adverse effects on the growth of the economy.
Usually excessive borrowing through Treasury Bills (TBs)—instruments used by government to borrow from the local market—is the main factor contributing to high interest rates.
“The other alternative would be to appeal to donors to come in and assist us with money to buy maize which can later be subsidised. That is why the move by IMF is very welcome,” said Chulu.
The IMF, usually against subsidies, has given Malawi a go ahead to import and provide maize at subsidised price to the starving masses.
The IMF also agreed to the government request for emergency assistance to facilitate food imports without depleting the RBM reserves to levels that would no longer provide protection against unforeseen shocks.
National Bank of Malawi (NBM) economist Joseph Chizumira said in a separate interview that government should not just bank on the pledge, saying the monetary body may not implement it.
“The situation is tricky. The problem is that the annual inflation depends on the food index most of which is maize which is in short supply. Eventually the prices will rise. It will not be easy to reach the inflation target by December. We only hope that the IMF will implement what they have pledged,” said Chizumira. |
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