In real life, there is generally a difference between theory and practice. Whereas theory normally projects what is supposed to happen in an ideal situation (all things being equal), generally, practice defies the odds and gives a different result altogether.
This appears to be the situation facing our economy in one way or another. For example, whereas the Reserve Bank of Malawi (RBM), through its Monetary Policy Committee (MPC), announced that the bank rate would remain at 25 percent, it seems the real situation on the ground is different.
RBM said the MPC, which is chaired by the central bank Governor Charles Chuka, based its decision to maintain the cost of borrowing at 25 percent on “regular economic and monetary analyses”. RBM raised the bank rate from 19 percent to 25 percent on December 3 2012, in an apparent bid to stabilise the kwacha and contain rising inflation.
However, in reality, the inflation rate, which was at 12.9 percent in April 2012 when Joyce Banda ascended to the presidency after the death of president Bingu wa Mutharika, stood at 35.1 percent as at end January 2013, according to figures from the National Statistical Office (NSO).
In April 2012, the bank rate was at 13 percent before it was revised upwards to 16 percent in May and later to 19 percent. We were told the review was to strengthen monetary policy in view of the liberalised exchange rate which saw a massive 49 percent devaluation of the kwacha and its subsequent floatation.
These measures were part of the prescription to restore an International Monetary Fund (IMF) economic programme for Malawi. Usually, “a good relationship” with the IMF acts like a positive rating to other bilateral donors to provide budget support.
The result of the reforms has been untold misery to many Malawians. Theorists told us that beyond the paid, if everything works according to projections, the results would be good for us all. But reality urges us to ask: When will that be? When shall milk and honey flow? How long should we be squeezed before we can see the results?
Fast track the situation to January 2013. President Banda tells IMF managing director Christine Lagarde that her government underestimated the possible impact of the reforms due to “inaccurate information and data that was used from the previous [Democratic Progressive Party] administration.”
If you add the President’s statement to sentiments or signals coming from the central bank, then one sees that things are not adding up.
Whereas the central bank wants us to believe that by maintaining the cost of borrowing at 25 percent the situation is somehow under control, the reality on the ground is different.
For example, treasury bills (T-bills) are once more becoming a very lucrative investment with earnings hovering around 45 percent! This is an indication of excessive borrowing from the domestic market by authorities through RBM.
In fact, one banker confided that the situation is not as rosy as there is a critical liquidity squeeze (shortage of cash) in the market. T-bills rates now around 45 percent.
When all is said and done, commercial banks will likely raise their interest rates, including the lending rates, upwards. Now, that will be suicidal! Currently, the cost of borrowing from commercial banks, at 40 percent-plus, is too much to bear.
If the commercial banks’ move comes to pass, it will indicate that the MPC’s position does not reflect the situation on the ground. It was the same situation with the recent fuel pump price increase which was minimal at K10, but, the real cost was covered by the reduction in some levies in the price build up. Look out for the next price review.
Back to theory versus reality, surely, we need a reality check. There is need to go back to the drawing board and review the equation to see where we got it wrong. We cannot afford to keep experimenting with people’s lives.
Or, could it be that “inaccurate information and data” is again being used to compute crucial indicators?