Dynamics of inflationary processes in Malawi

DYNAMICS OF INFLATIONARY PROCESSES IN MALAWI: AN ECONOMETRIC ANALYSIS* Kisu Simwaka Research & Statistics Department Reserve Bank of Malawi The paper investigates the sources of inflationary pressures in Malawi and suggests ways of mitigating such pressures. In the first part of the study, we test for unit root test to determine the order of integration of the variables. A model of inflation is estimated as a co-integrating vector that spans nominal exchange rate and domestic output. In the second stage, a model of inflation is estimated with first differences of the non-stationary variables, a level variable and the co-integrating vector. Results indicate that inflation in Malawi is a result of both real and monetary shocks to the economy. It is further observed that current slumps in production generate inflationary pressures. This is due to the fact that food, a perishable product, exerts an immediate impact on inflation. Measures to control inflation must therefore emphasize enhancing production and supply, especially food. It is also imperative that efforts be made to improve distribution and road networks to reduce costs. It is worthy to note that although a lot of efforts have been made to curb domestic credit expansion, capital inflows are not usually taken into account and yet they constitute a major source of liquidity injection. Without proper measures including sterilization, the problem will continue to plague the nation. Monetary expansion will need to be controlled through more disciplined financial management to counteract these externally generated liquidity injections. It must also be noted that exchange rate adjustments fuel cost-push inflation. Thus the inflationary problem in Malawi is a multifaceted issue with many causes. Inflationary control should aim at policies directed at both real and monetary factors. Keywords : Inflation; Co-integration, Vector Autoregression *The findings, interpretation and conclusions expressed in this paper are entirely those of the author. They don’t necessarily represent the views of the Reserve Bank of Malawi.