There has been a sharp drop in liquidity levels resulting in the shortage of kwacha in commercial banks, a situation blamed on the recent 49 percent devaluation of the local currency.
The Reserve Bank of Malawi (RBM) has responded by introducing a discount window borrowing at 18.5 percent for “stressed banks” to access and avert a Malawi version of the liquidity crunch, the National Bank of Malawi (NBM) has said in its economic newsletter for July 2012.
This move has compelled the banks to also raise their base lending rates twice since the devaluation of the kwacha on May 7 2012.
Commercial banks have now pegged the lending rates at around 24 percent, making the cost of borrowing higher for most people, at a time when inflation has shot to 17.3 percent in May, according to the National Statistical Office (NSO), pushing the cost of living higher.
The official benchmark interest rate is at 16 percent since May from 13 percent, a monetary policy stance which money market analysts warned earlier would culminate into commercial banks hiking their lending rates.
According to the NBM newsletter, the shock of a recent devaluation has seen a “kwacha liquidity squeeze” at some commercial banks due to transitional challenges in transacting at the new rate.
RBM spokesperson Ralph Tseka on Monday that after the devaluation, commercial banks started clearing some backlog of external payments by most importers which resulted in wiping out excess liquidity in the financial market. Malawiâ€™s import backlog is estimated at $350 million.
He also said some banks started flocking to RBM for assistance which prompted the central bank to introduce a non-collateralised window.
“The banks were, therefore, squeezed of the kwacha and started to come to us. It is true that we introduced a non-collateralised window where the banks that are stressed come to borrow and that has been done to avoid liquidity crunch,” said Tseka.
He said the idea is to help the stressed banks, but emphasised that the RBM is closely monitoring the performance of the banks to ensure that no bank fails in Malawi.
The sharp drop in liquidity levels has stunned market analysts who said they have never experienced this scenario before.
“The market is very short of money…this is very surprising. The RBM has just introduced the discount window borrowing and the banks are scrambling for cash. The cost of borrowing has gone up,” said the analyst who did not want to be named.
While making borrowing expensive by raising the bank rate could help tame galloping inflation, analysts do not believe that such a move could have coursed through the financial system so soon to have a dent, especially at a time inflation is swinging double digit slots and the kwacha devaluation, on the back of an import cover hovering around one month, has ballooned the number of loitering kwachas chasing few foreign currencies.
An increase in the base lending rate to about 24 percent is a cause for concern to ordinary borrowers as it reflects a wider interest rate spread-bank lending rate minus deposit-which is feared for increasing the cost servicing bank loans and consequently deters savings culture in an economy.
The tight monetary policy stance also affects economic growth and may even lead to a recession as high cost of finance may discourage businesses to borrow for expansion. The move could also hit hard an already troubled job market, especially at a time government is pursuing an austerity policy stance.
Malawiâ€™s Finance Minister Dr. Ken Lipenga said on Friday during a post budget round table discussion in Lilongwe that RBM increased interest rates as a way of mopping up liquidity in the market and hoped that such a measure, among others, will help restore the credibility of monetary policy implementation process.