The Reserve Bank of Malawi (RBM), the country’s monetary authority, has said there are prospective risks associated with an increase in reserve money arising from the implementation of the government budget.
If not well managed an increase in money supply has negative effects on the economy leading to inflationary pressure—a general rise in prices.
RBM has been implementing a tight monetary policy aimed at controlling money supply and rein in inflation.
Minister of Finance, Economic Planning and Development Goodall Gondwe presented a K210 billion provisional budget for four months—July to October—compared to K638.2 billion 2013/14 Budget. He is expected to present a comprehensive budget in September.
The central bank, in the latest Monetary Policy Committee (MPC) meeting minutes, held on Tuesday noted that fiscal prudence and management of food supply situation will be critical to mitigating inflationary pressures.
Analysts have recently pointed out the negative effects of fiscal indiscipline such as heavy domestic borrowing which include crowding out the private sector.
Inflation turned the corner in February, falling from 25.9 percent in January to 24.6 percent. It fell to 22.6 in May while the RBM expects it to recede to 20.5 percent in December.
The MPC, which was chaired by RBM governor Charles Chuka, also noted that the government’s domestic credit from commercial banks was the major determinant of monetary growth in May 2014.
The MPC on Tuesday cautiously resolved to cut the policy to 22.5 percent from 25 percent, a rate that has been maintained since December 2012.
According to the MPC minutes, net credit to government was the major determinant of monetary growth in May 2014 with its contribution rising to 25.7 percent in May 2014, up from five percent in January 2014.
In April, domestic credit from commercial banks rose to K514.2 billion from K448 billion.
According to RBM, government’s domestic credit rose to K245.8 billion while credit to the private sector declined by K1.1 billion to K263.8 billion from K264.9 billion.
The authorities have noted that real private sector credit contribution to monetary developments has steadily declined compared to a similar period in 2013, signalling the effects of tight monetary policy over the period.
According to the MPC minutes, the authorities observed that money supply growth at 26.5 percent in May 2014 has moderated to levels consistent with projected nominal GDP growth for 2014 and has been declining for the past five months while reserve money which had been growing at an average of 55 percent in the first quarter of 2014 moderated to 35 percent in April and May 2014.