Economists back bank rate cut
The Economics Association of Malawi (Ecama) and a professor of economics at Chancellor College have separately welcomed the Reserve Bank of Malawi (RBM) decision on Tuesday to cut the bank rate or policy rate by 2.5 percentage points to 22.5 percent.
They said the development would translate into easing the cost of borrowing in commercial banks and spur agricultural production and growing the economy further.
In an interview yesterday, Ecama executive director Nelson Mkandawire said it was acceptable for RBM to drop bank rate considering the fact that inflation rate continues to decelerate.
“Ideally, we have been making the call [to revise downwards the bank rate] for a while and if they have dropped it down, we fully accept it,” he said.
Added Mkandawire: “We have had prolonged high interest rates which have been a deterrent to most Malawians to borrow. This [reduction] is right and proper and we feel people can start going to the banks and start borrowing.”
He hoped that the decision to slash the bank rate would also help encourage a culture of investment among Malawians.
In a separate interview yesterday, Professor of economics at Chancellor College, Ben Kaluwa also backed RBM move to cut policy rate saying it will help anchor Malawi’s production cycle.
“This is the right time and it’s good for our economy especially to agro-related activities and hence it gives producers space,” he said.
But a Lilongwe-based banker yesterday cautioned against the move saying it could potentially trigger high borrowing from commercial banks which he said could induce a huge appetite for foreign exchange.
According to the banker, who opted for anonymity, said in turn that will likely exert pressure on foreign exchange market and increase the price of a unit of foreign currency hence weakening the local unit against other major currencies.
RBM’s Monetary Policy Committee (MPC), chaired by RBM Governor Charles Chuka, resolved the Committee resolved to adjust the policy rate downwards by 2.5 percentage points to 22.5 percent effective yesterday July 9 2014.
Economic principles in Malawi as applied to solve the specific situation the country faces are naïve. The order of magnitude of RBM bank rate cut that can have real impact to boost the economic must go as far as below 5%. That will drive Commercial banks to lend at an interest rate of below 10%. That will stimulate borrowing to invest in industries thereby generating production output (growth) and jobs (employment). Every Malawian who acquires a job has practically escaped poverty. By growing the number of Malawians in jobs, the economy is effectively eliminating poverty by expanding the middle class. By operating with low interest rates, it means more and more companies will be created and they will survive the dreaded first two years which are statistically well proven to be difficult for start-ups survival. Low interest rates are also critical to enable start-up cottage industries to graduate into multi-million dollar corporations.
One of RBM central objective is to stimulate economic growth in the country but this goal has been give lip-service only in the past 50 years with the policy of exorbitant interest rates. A 3% interest rate cut for Malawi is not worth the paper it is written on. Hence it must not be celebrated but condemned in the strongest possible ways. RBM, by pursuing arbitrary goalless irrelevant interest, inflation and monetary policies not fit for purpose, has been one of the pillars responsible for holding the economy back! The other being headless pursuit of pointless subsistence agriculture that generates no employment growth nor productivity growth in Malawi. Reform now!