Economists and the Consumers Association of Malawi (Cama) have warned that the K5 000 banknote Reserve Bank of Malawi (RBM) is introducing will fuel inflation, but the central bank argues that emerging economic trends justify it.
RBM Governor Wilson Banda announced the introduction of the K5 000 banknote as the highest denomination and an upgraded K2 000 note. The new notes will be released into circulation on February 24 2022, he told a news conference in Lilongwe yesterday.
RBM last introduced a higher denomination note of K2 000 on December 19 2016.
Banda said since the introduction of the K2 000 note, there have been a lot of economic developments that have necessitated the review of the denomination mix and introduction of a higher denomination as well as upgrade of the K2 000 fitted the bill.
He said: “Among other things, the policy guides that the highest value denomination should not account for more than 60 percent of the total value of currency in circulation.
“When that happens, the bank can apply a number of measures one of them being introduction of a higher banknote denomination. In the present case, our highest value denomination, the K2 000 banknote, has been above the 60 percent threshold for some time and has hovered above 80 percent.”
Banda also told journalists that by introducing the new K5 000 note and an upgraded K2 000 note, the central bank’s also intends to reduce “new note issue costs”.
He said the reduction in issue costs will be achieved as buyers will need one K5 000 note to settle a K4 000 bill instead of requiring two K2 000 banknotes.
“In that case, the bank will import fewer banknotes than before thereby reducing new note costs,” Banda said.
He said the issuing of the new K5 000 notes has cost the bank an initial K1.4 billion.
Banda said RBM also considered portability of the currency before introducing the notes, saying that currency has to be easily and economically carried from one place to another and it has to be high value but in small quantity.
But reacting to the development, Cama executive director John Kapito said the introduction of a K5 000 high note speaks volumes that the economy is in bad shape and that the central bank is admitting that the kwacha is now valueless.
He said: “The moment we introduce such high value notes, it is an indication that your economy is really in turbulence. Inflation has hit us hard and that is the message from the Reserve Bank.
“If you carry K5 000 as a note in a shop, you can buy almost nothing. It is a big and long journey, but I think that is a clear and good statement about the state of the economy.”
In a separate interview, Gowokani Chijere-Chirwa, who teaches economics at the University of Malawi, said introducing a high note usually means that inflation is rising.
He said: “It means the lower notes can’t buy a lot. In short, they are becoming useless. Take the case of Zimbabwe, just a decade ago and Germany around 1921 to 1923.
“The high note may mean that our economy is heading to the abyss of inflation. Soon we will be requiring wheelbarrows to carry money to buy bread, if this continues. These things bring unrest in the society.”
Chijere-Chirwa also said the introduction of the new note counters Malawi’s efforts towards achieving a cashless economy.
He said: “It may also mean that the inflation figures being reported on the ground are not a true reflection of real inflation out there. At the current inflation, the high note may not be of need. Also, it may mean that the RBM may have just been doing haphazard policies that may have not improved the economy.”
Reacting to the concerns, Banda defended the central bank’s action, saying Malawi still remains largely a cash economy, adding that the majority of Malawians are still using cash as a medium of exchange.
He also allayed fears that headline inflation is currently out of hand, saying the rate of inflation is still below 10 percent and is manageable.
Earlier in his presentation on the features of the new notes, RBM manager responsible for currency planning and policy Muopeni Ngwalo said the bank has replaced the image of the Malawi University of Science and Technology at the back of the new K2 000 note with an image of Blantyre Magistrate’s Court.
He said the former image represented the theme of tertiary education as one of Malawi’s aspirations while the new image changes the theme to the urgent need for the country to fight corruption.