Renowned business and leadership consultant Henry Kachaje on Tuesday described the prevailing business environment as hostile, saying if the situation persists, most businesses will close shop for good.
“The business environment is not good, to be honest. Inflation rate is still very high and bank lending rates are also high and these are key economic indicators for an economy which is going through hard times,” said Kachaje, who is also president of the Economics Association of Malawi (Ecama), a local economic and policy think-tank.
He was asked to comment on the state of the economy, which has been characterised by severe shocks, including a sharp fall in the value of the local currency against other foreign currencies within a short space of time, uncertainty of budget support resumption and huge amount of domestic borrowing by government.
Kachaje said currently, the domestic economy is gripped by two major “enemies of economic growth and development”, citing high interest and inflation rates.
Commercial banks have in recent weeks hiked their base lending rates to around 39 percent while inflation, the general rise in the prices of goods and services, is at 23.3 percent for October, according to the National Statistical Office (NSO).
The banks have increased their lending rates to align their rates with the recently hiked bank rate, the rate at which commercial banks borrow from the central bank, to 25 percent.
“The challenge is that it is difficult these days for businesses to survive on their own resources. We have so many businesses and the time they were taking a risk to borrow, rates were manageable and now they find themselves in a situation where they cannot really repay,” said Kachaje.
He said the buying power of many Malawians is also dwindling as their salaries have not yet grown at the same rate as the rate of price increases on the market.
Said Kachaje: “If we continue on this root, I think we should be afraid and worried as a country because it is not a sustainable trend.
But we believe measures will be undertaken to curb the rising interest rates. Fortunately, both interest and inflation rates are controlled.”
He explained that in Malawi, both interest and inflation rates are fuelled by the spending appetite of government, which is borrowing heavily on the domestic market to finance its operations.
Kachaje advised government to critically analyse the kind of expenses that the country is carrying through in the 2014/15 budget.
He cited the huge allocation of budget resources to the Farm Input Subsidy Programme (Fisp) as one key area that is unsustainable as government subsidises 90 percent of the cost of farm inputs.
“We used to eat bread with margarine, probably you cut that and then go backwards and eat say zitumbuwa which is something within your means. If government gets into that kind of discipline, where non essential spending is seriously curtailed, then we can bring this economy back on track.”
Last week, Finance Minister Goodall Gondwe admitted that the economy is passing through ‘turbulent times’, citing a sharp fall in the kwacha against other major currencies, huge amount of domestic borrowing and uncertainty over the resumption of budget support as some key economic challenges haunting his office.
Government operations have currently crumbled due to inadequate funding, at a time the Malawi Revenue Authority (MRA) is failing to meet its revenue collection targets.