Food Insecurity and Loose Policy to Drive Inflation Higher in Madagascar

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Tuesday, October 25, 2016/ 9.42am /BMI Research

BMI View: Madagascar will see a resurgence in inflation over the months ahead as food insecurity drives the food price component of inflation higher. The Banque Centrale de Madagascar's rate cut in March and further accommodative policy over the next 18 months will provide further impetus to price growth in the months ahead as domestic demand picks up
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Headline inflation in Madagascar will begin to rise in the months ahead on the back of continued food insecurity and loose monetary policy in the country. We forecast inflation to rise from 6.0% y-o-y in March to 8.2% by year-end and it will average 7.9% and 8.6% over 2016 and 2017 respectively.

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Food Insecurity Will Drive Inflation
Crop production in southern Madagascar will remain poor over the next harvest season as a result of El Niño-induced droughts over late 2015 and early 2016, resulting in upward price pressures. According to the Famine Early Warning Systems Network, cassava yields will remain under pressure as low cassava cuttings from the previous harvest season hampers planting capabilities in the months ahead.

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Madagascar's economy and population are heavily dependent on agriculture and we believe that waning food supply in southern regions will put upward pressure on the food price component of inflation.

This is highlighted by food and non-alcoholic beverages constituting 50.6% of the consumer price basket and is characteristic of the subsistence nature of agriculture in the country.

Accommodative Policy Will Put Upward Pressure on Prices
The Banque Centrale de Madagascar (BCM) will maintain an accommodative approach to policy after lowering the benchmark policy rate from 8.7% to 8.3% in March in an effort to facilitate increased economic activity within the country, and this will drive an uptick in inflation over 2016 and 2017.

Inflation has subsequently begun to rise from March onwards and we expect the BCM to keep rates on hold in the months ahead in an effort to encourage economic activity.

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As economic activity picks up in Madagascar, albeit gradually, we expect lower interest rates and rising domestic demand to drive price growth.

As such, we forecast real private consumption growth of 2.5% in 2016 and 2017 compared to 2.0% in 2015 and expect it will be a key driver of rising core inflation over the period.

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