Reserve Bank of Malawi (RBM) said on Friday unless immediate action is taken to address rising inflation rate, Malawi will continue to experience high interest rates which have been prevalent for three years now.
Last Wednesday, RBM raised the bank rate—the rate at which commercial banks borrow from the central bank as the lender of last resort—by two percentage points to 27 percent from 25 percent due to “persistently high inflation, depreciating exchange rate as well as uncertainties on food price and wage demands”.
In an interview on the sidelines of the Bankers Association of Malawi (BAM) dinner and dance in Blantyre, RBM Governor Charles Chuka said the bank rate hike has been necessitated by high inflation rate, currently at 24.1 percent, which has come about due to government’s borrowing occasioned by budget support withdrawal due to Cashgate, drought and floods.
He said: “We have gone through tough times, as you know the kwacha was devalued in 2012 and other circumstances such as flooding meant that government had to operate at a different level and this meant that government had to borrow money which we knew would fuel inflation.
“So, you cannot rollover high [domestic] debt over low interest rates. High interest rates are going to be with us for a while unless we take immediate action.”
Chuka said among other actions to be undertaken, government is looking at “options on how to ensure fiscal discipline, that unnecessary expenditures are cut so that there is room in terms of resources for the private sector.
“What government is doing to cut expenditure, to reform the civil service is what all countries do so that their balance sheets can be contained within availableresources.
“That is the solution; it will hurt Malawians, but that is the price Malawians must pay if our country must stabilise,” he said.
Chuka said high interest rates scenario currently prevailing is not for investment, but for sacrifice, observing that only businesses with enough capital stand to survive.
BAM president Misheck Esau, in a separate interview on Friday, expressed disappointment with the new bank rate, saying it will have a direct impact on borrowing by businesses.
“We are disappointed because we believe that for this economy to grow, interest rates have to come down. An economy where interest rates stick up like the way they have done for three years since 2012 is too much for the business community to take.
“I hope those that are responsible for fiscal policy, especially the supply side of the economy, can do something quick. Definitely the budget has to be cut; government cannot continue to borrow at the rate they are borrowing. We cannot continue to be passing our own interest costs of this magnitude to the business community,” he said.
Esau, however, said by increasing interest rates, there is a possibility that inflation would go down in the long-run.
He said the central bank has raised bank rate to push commercial banks to raise interest rates to tame inflation.
“Higher interest rates tend to get people to rationalise what they consume. Non-priority consumption spending is cut and when that is cut, you reduce effective demand in the economy and inflation can start coming down,” he explained.