On Wednesday this week, EPHRAIM MUNTHALI had a wide-ranging interview with Reserve Bank of Malawi (RBM) Governor Dr. Wilson Banda on broad economic issues, including prices, foreign currency shortages and how he sees the future in these uncertain times. Hereunder are excerpts from the interview:
How would you sum up the current economic trajectory?
The economy has gone through difficult times, but we expect that going forward, with all the measures government is putting in place, we believe that we should come out stronger; that we should see resumption in stronger growth and more contained inflation. We have put measures to bring down inflation, so we believe that inflation will be lower; we will have a more stable exchange rate and we will have a stronger growth in GDP (gross domestic product), so the trajectory for Malawi looks very promising despite the fact that we are coming from very difficult times.
What policy mix is being pursued currently and to what extent do you believe this approach will help turnaround the economic situation?
I would say monetary policy will continue to be tight, the exchange rate will continue to be realistic and we have seen a tightening on the fiscal side. So, when you look at the three elements—the exchange rate, monetary policy and fiscal policy—you see that these are responding to what has happened to the economy. On the monetary policy front, as you know, the Monetary Policy Committee (MPC) met recently and made the decision to adjust the policy rate from 12 percent to 14 percent. That was largely in response to the rising inflation in the country. We wanted to make sure that all the inflation is kind of contained and controlled. We believe that we need to have an environment that is not undermined by inflation so monetary policy will remain very tight. But at the same time, we are looking at a situation where the economy was rebounding from years of slow growth, subdued growth and we had kept our policy rate unchanged for a long, long time essentially to allow the economy to recover. You could say at that time we were kind of accommodative in terms of monetary policy, but as inflation started picking up, we said no we can’t continue with that accommodative monetary policy, so inflation is now being checked and that has become a priority for us. On the exchange rate side, we want to maintain and continue looking at the exchange rate making sure that it reflects supply and demand. I know that you had a question where you are asking whether the exchange rate is realistic or not given the current shortages in the market, we are looking at that. We want to make sure that this misalignment that may have arisen in the recent past is controlled, is checked. We want to make sure that there is no misalignment; that the supply for foreign exchange matches with demand for foreign exchange and the price that comes out of it is a realistic price, thus making sure that the exchange rate becomes realistic. On the fiscal policy side you will have noted from the government, especially the Minister’s [of Finance] recent submissions to Parliament, where he has basically said that it will be tightening on the fiscal side; that generally government borrowing from the market is going down, which is a very positive move and we hope to see that continue as that will allow the economy to release resources to more productive uses because as government borrows heavily it crowds out the private sector, so the position that the Minister has taken to reduce gradually government borrowing over the short to medium term is a good move because the tightening of the fiscal policy allows the private sector to be crowded in. So, that policy mix for me is good and I think it will create a recipe for a rebound in the economy.
You said monetary policy will continue to be tight. That, in my view, should mean that interest rates are likely to continue rising as long as indicators show upward trends in inflation. Are my assumptions correct?
For as long as inflation is a problem, I would not rule that out because it would not make sense for us to keep interest rates or the policy rate low when inflation is actually undermining everything about this economy. So, inflation will really have to be dealt with and you cannot expect to have any growth in a sustainable manner in an environment that is undermined by inflation. It is actually a mandate of this institution as a central bank to make sure that prices are stable.
How effective is the monetary policy rate tool in curtailing runway inflation in a country where the inflation basket is over 50 percent impacted by food, low forex reserves, a large informal sector, a large unbanked population not to mention the increasing public debt and increasing cost of business?
The question that you are also asking is whether monetary policy is effective at all. It could be an academic question, but it could also reflect on the structural issues we have in this country. To the extent that inflation remains a monetary phenomenon, a lot depends on the extent to which you have money supply in circulation. If you have high growth in money supply against an economy that is not producing anything or very few goods and services no matter where those goods and services are produced, there is going to be inflation, so the policy rate or, monetary policy focuses on money supply. We want to argue that the more stringent monetary policy is the less would be the growth in money supply and when money supply grows less strongly, it will have a direct impact on prices because there won’t be that money to chase the few goods and services in the economy. I think that is broadly the way we look at it. So, inflation is a monetary phenomenon and the way to deal with it is to tackle it from the monetary side and adjustment of the policy rate is that tool.
The foreign currency situation is worrying stakeholders. Besides mandatory sale of forex proceeds, what other measures do you have to rebuild forex reserves?
Ordinarily as a central bank we do short term borrowing, the use of Swaps, the use of lines of credit with other financial institutions to fill the gap and that is what we are doing really…to go out there, identify short-term financing to help meet our short-term needs. But in the long term, obviously you need to build capacity—export growth is important and the issue of the 30 percent mandatory sale of forex from exports is a short-term measure and that I must emphasise, it is a short-term measure. In an ideal environment where we don’t have all these pressures, exporters should have the liberty to hold on to 100 percent of their export proceeds. You recall that in the early 1990s we moved on to 100 percent export proceeds retention, we want to go back to that arrangement. We think that is the best that can happen to the economy. So, to answer your question, in the very short term, we are going to borrow, we are going to get 30 percent from export proceeds, but in the longer term, we are going to build export capacity.
You have talked about swaps and lines of credit but, correct me if I am wrong, we understand that regional banks that have been very pivotal in supporting Malawi’s short-term foreign currency needs have been a bit skittish because of confidence issues about Malawi regarding the country’s ability to meet these liabilities. What is your take on that?
That problem is not unique to Malawi. As I said in my opening statement, the global problem of Covid has affected all economies, regional economies and the global economy. For us, compounding that were the issues of cyclones etc. Clearly that has affected our capacity to generate foreign currency, so as we engage these regional institutions, they also look at our capacity to pay back. They have not been apprehensive per se, but they have just been cautious. We have a relationship with most of these institutions, in fact, virtually all of them, that go a long, long, back and over time we have built confidence, we have built comfort over the years and clearly what has happened in the past year or two would not destroy that type of relationship. So, I would not say that they have lost confidence in us, but I would say that globally everybody is trying to be careful in what they are doing. Similarly, within Malawi as we go out to borrow money for these short term needs, we are also careful about issues of over exposing ourselves as I have already mentioned the issue of unsustainable debt and borrowing over short term piles up debt so we really need to be careful.
You talked of over-exposure. What is Malawi’s exposure in terms of foreign currency liabilities and their implications going forward?
I don’t have a figure right now, but I would say that it is manageable. I have mentioned the issue of unsustainable debt in the medium to long term. In the short term I think we can still borrow for as long as we can pay back. Short term I think is very sustainable. Our level of exposure as a ratio of GDP is 56 percent. It’s not too bad, but the challenge comes in with the capacity to pay if our exports are not doing well and that is a problem. But if we can borrow through swaps and [others] we can manage it, so yes, we have an exposure, but we think we can manage that exposure. This is why we are still in the market and we are still engaging with our foreign counterparts.
You came to the Bank at a very trying time for the economy and the pressures of work and other things must have taken a toll. How are you fairing?
I am fine. I am surviving. As you know my first term with the Bank was for 31 years. I did all the growing up in the Bank, developing professionally here and then I took a break for close to eight years. Coming back this time, things have changed, but not so much. It is familiar ground, but the challenges are a little different now, but coping has not been too difficult. I have got a team that is very hard working, very supportive, so it has been soft landing for me as it were. In the economy, the issues have been very difficult because I came in at a time that Covid had just hit and as we are getting out of Covid then we have the cyclones and all these other things, so yes, I am dealing with challenges that were not there that time, but we are surviving.