Despite COVID-19 negative effects, Malawi recorded relatively low and stable inflation rate

By Duncan Mlanjira

Despite the negative effects of the COVID-19, Malawi has recorded relatively low and stable inflation rate, Minister of Finance Felix Mlusu said when he presented the 2020/2021 budget in Parliament on Friday.

He said headline inflation rate declined to 8.0 percent in July 2020, from a peak of 11.5 percent in December 2019 and going forward, the Government, through the Reserve Bank of Malawi, will pursue a low inflation agenda with a target rate of inflation at 5.0 percent by 2025.

“The Reserve Bank maintained the policy rate at 13.5 percent during the 2019/2020 fiscal year and the official exchange rate has also remained stable at around K750.00 per US dollar.”

The Minister said the 2019/2020 budget performance of revenues and grants, were K1.575 trillion and of this amount K1.425 trillion was domestic revenue while K150.1 billion were grants.

“However, actual domestic revenue collection at the end of the year was K1.226 trillion. Grants amounted to K127.1 billion, representing an underperformance of 15.3 percent on account of non-disbursement of project grants by Foreign Governments.

“In June 2019, this august House approved total expenditure of K1.737 trillion (27.7percent of GDP) comprising K1.299 trillion for recurrent expenditure and K438.2 billion for development expenditure.

“At the end of the fiscal year, total expenditure was recorded at K1.781 trillion of which K1.414 trillion is recurrent expenditure and K367.4 billion is development expenditure.

“The 2019/2020 financial year closed with a deficit of K555.6 billion. Domestic borrowing increased from K52.3 billion to K496.7 billion while net foreign borrowing reduced from K109.7 billion to K58.9 billion.”

Mlusu said the fiscal actions during the last fiscal year alone added K555.6 billion to the country’s already high debt stock.

He quoted the June 2020 World Economic Outlook Report of the International Monetary Fund, that global economic growth is projected at negative 4.9 percent in 2020.

“COVID-19 pandemic, started as a healthy crisis but quickly became an economic crisis like no any other before.The impact of the pandemic was severe during the first half of 2020 and economic recovery is projected to be gradual than previously forecast.

“In 2021, global growth is projected at 5.4 percent. These projections, Madam Speaker, are however shrouded with high degree of uncertainty.

“In advanced economies, growth is projected at negative 8.0 percent in 2020. Synchronized deep downturns are projected in the United States at negative 8.0 percent; Japan at negative 5.8 percent; the United Kingdom at negative 10.2 percent; Germany at negative 7.8 percent; and France at negative 12.5 percent.”

In 2021 growth rate in advanced economies, Mlusu said it is projected to strengthen to 4.8 percent, which is higher than 4.0 percent registered in 2019 and that in emerging markets and developing economies, overall, growth is forecasted at negative 3.0 percent in 2020.

He added that economic growth in China is projected at 1.0 percent in 2020 while in India, it is projected to contract by 4.5 percent.

“In Latin America, where most countries are still struggling to contain coronavirus infections, the two largest economies, Brazil and Mexico, are projected to contract by 9.1 and 10.5 percent, respectively.

“GDP growth in Sub-Saharan Africa has also been slushed down from pre-pandemic growth rate of 3.1 percent to negative 3.2 percent in 2020.

“The region is, however, expected to recover in 2021 and record a growth rate of 3.4 percent. South Africa, Malawi’s major trading partner is projected to register a recession of negative 8.0 percent in 2020, but rebound in 2021 to a growth rate of 3.5 percent.”

Mlusu said growth prospects for Malawi are shrouded with extreme uncertainty as pre-pandemic real GDP growth rate for 2020 was forecast at 5.1 percent.

“However, due to the adverse economic impact of COVID-19, GDP growth rate was revised downwards to 1.9 percent on the assumption that there will be gradual opening up of economic activities during the second half of 2020. In 2021, this economy is projected to grow at 4.5 percent.”

Moving on to price developments, Mlusu said the annual average rate of inflation has remained within the single digit, recorded at 9.2 percent and 9.4 percent in 2018 and 2019, respectively.

In 2020 and 2021, annual average inflation rate is projected at 10.5 percent and 9.3 percent, respectively, with an average of 9.9 percent for the 2020/2021 fiscal year.

Inflationary pressure during the last fiscal year emanated from increased food inflation especially from maize prices on account of scarcity in some parts of the country as well as price speculative buying and hoarding by some traders.

On the other hand, Mlusu said non-food inflation has been oscillating between 5.0 and 6.0 percent over the past 13 months.

“This was largely on account of the stable Malawi Kwacha exchange rate as well as the low oil prices on the international market.

“Global oil prices, which directly feed into non – food inflation, fell to a historical low of US$22.58 per barrel as at 30th March 2020.

“The macroeconomic stability enabled the Reserve Bank of Malawi to maintain the policy interest rate at 13.5 percent. This enabled commercial banks to maintain an almost stable interest rate structure.

“Gross official reserves of the central bank have also remained stable as measured by months of imports at around 3.1 months as at end June 2020.”