Investment analysts have warned that the impact of lower rates on economic recovery and job creation may not be felt as the country faces risks brought by the Covid-19 pandemic.
In view of declining inflation rate this year, the Reserve Bank of Malawi (RBM), at its fourth Monetary Policy Committee (MPC) Meeting last month slashed the policy rate—rate at which commercial banks borrow from RBM as lender of last resort—to 12 percent.
The central bank said the decision was made to support economic recovery and job creation.
But investment and advisory firm Bridgepath Capital Limited has argued that most firms were already operating below their capacity due to the impact of Covid-19; hence, the increase in consumption that may be triggered by the lower rates may only restore jobs which were previously made redundant
In an analysis on the impact of the policy rate cut, Bridgepath Capital Limited chief executive officer Emmanuel Chokani observed that the economy may not be able to increase output in response to increased consumption due to several bottlenecks such as Covid-19, which has disrupted supply chains, and inadequate power supply that the country faces.
“As the policy rate has been cut, the cost of borrowing has fallen as such firms and individuals will increase their borrowing, leading to an increase in consumption which will only increase demand for goods and services,” he said, arguing that there is be need to further cut the rate so that enough jobs are created.
On his part, Alliance Capital Limited research manager Bond Mtembezeka said the current low policy rate cannot translate into a restoration of jobs because the domestic economy is still experiencing the effects of coronavirus.
“Malawian banks are a bit risk-averse; hence, in view of the effects of the Covid-19 pandemic, banks may not necessarily lend more as risk is still elevated,” he said.
Mtembezeka said there is need for a special fund to support small and medium enterprises during this period, adding that most economies have done it and that has helped to support enterprises.
“At this point, RBM has to be cautious. Fuel prices have gone up and we are entering into a period where maize prices soar.
“So RBM just has to watch and see how these things will evolve,” he said.
Taking his turn, Cedar Capital Limited chief executive officer Armstrong Kamphoni observed that elsewhere governments are pumping money into the economy by gifting certain groups of people with cash.
He said this does not only help the people involved to access necessities but also the economy at large by boosting spending.
Kamphoni said: “What the MPC in Malawi might be doing is a form of quantitative easing where the central bank borrows long-term and interest rates are reduced to deliberately increase liquidity.
“But whether our local economy will respond to this kind of stimuli is a different matter altogether as access to credit is not widespread,” he said.
Malawi’s economy has been heavily affected by the Covid-19 pandemic with growth projected at one percent in 2020, down from earlier projections of 4.8 percent.
With population growth around three percent, this represents a two percent contraction in per capita gross domestic product, according to analysts.
In worst-case scenario, the economy could slip into recession—a business cycle of contraction when there is general decline in economic activity.
