‘Malawi economy on recovery path’
The economy is turning the bend and is on a recovery path as evidenced by the reduction of the bank rate last week, Blantyre-based investment advisory firm Alliance Capital Limited has said.
RBM’s Monetary Policy Committee (MPC), chaired by RBM Governor Charles Chuka, on November 23 resolved to adjust the policy rate downwards by three percentage points from 27 percent to 24 percent.
The reduction in the policy rate—the rate at which commercial banks borrow from the central bank—comes at a time when the country’s economic drivers have shown signs of tremendous stress.
But according to the firm, the easing of inflation form 23.5 percent in July to 20.1 percent in October and the stability of the exchange rate, which are contrary to expectations, reflect fruits of the tight monetary stance that the RBM has engaged throughout the year.
Financial experts believe commercial banks will be quick enough to pass on the benefits of the new rate by slashing their lending rates.
Alliance Capital Limited in its market report for the period ending November 25 said the high interest rate environment has been very prohibitive to growth, especially to small and medium enterprises who already find it very hard to acquire credit facilities from commercial banks.
Reads the report in part: “This is so because a rise in interest rates discourages investment spending; makes firms and consumers less willing to make risky investments and purchases which ultimately results in lower economic growth and higher unemployment. This is why in part the economy has experienced sluggish economic growth and arguably the highest unemployment rate in recent years,”
“A decrease in interest rates will lower the cost of borrowing, which will encourage businesses to increase their investment spending and ultimately enhance economic growth. Relatively lower interest rates will also boast economic agents’ confidence and help contain expectations.”
When announcing the new policy rate alongside Chuka, Secretary to the Treasury Ronald Mangani, also described the reduction in the policy rate as the beginning of a turnaround in the economy, saying the move would help open more economic opportunities for businesses and Malawians as a whole.
He said: “This reduction in the policy rate reflects the fact that inflation rate is on the downward track and this means that the economy has started turning round in the right direction.
“We are hoping that production will respond to this move by RBM and we are hoping to see more goods being produced and more jobs created, and a trend that reflects a reversal in the economic instability challenge that we have been facing over a long period of time may be witnessed.”
While Chuka said that consistent implementation of a tight monetary policy stance, and actions taken by government to reduce fiscal pressures, including from Fisp [Farm Input Subsidy Programme] operations and Admarc’s [Agricultural Development and Marketing Corporation] maize operations, have combined to reduce inflationary expectations.
“Looking ahead, the factor that is unknown is whether or not the exchange rate would behave better than last year and much depends on fiscal operations. On [paper], the exchange rate outlook is far much better than last year, implying a much less inflationary impact from the exchange rate. While utility rates might go up, the increase might be relatively less. Thus, year on year, inflation will generally continue to slowdown.”
But in an earlier interview, Economics Association of Malawi (Ecama) executive director Edward Chilima while commending the central bank for the reduced bank rate, said there is more that needs to be done if the economy is to turn around.
“The reduction of the policy rate is recommendable and a good response to the economy. This is what the economy has been expecting. Actually it could have been lower than that, but since this is in line with inflation, this is the best they [authorities] could have done. Even at 24 percent, it is still not good enough because the interest rates are high at somewhere around 35 percent,” he said.
However, RBM remains upbeat. Chuka says he expects inflation to reach 22.2 percent this month (December), but to edge up slightly to 22.7 percent in February 2017 before decelerating to 18.6 percent in June 2017.
The school of thought that says that interests rates in Malawi are high because of Inflation is truly counter productive. Where does this misconception originate from? Inflation does not drive bank rate. It is Bank rate that drives inflation! How did we get our Monetary policy so mixed up?
I would urge all Malawians to stop blaming/pressuring commercial banks on lending rates. The whole mess is at Reserve Bank. They set the main bank rate that drive all lending rates. RBM bank rate filters through lending rates through the transmission mechanism to reduce or increase inflation.
Commercial banks are “innocent” here. Without going into details; if the RBM bank rate is 24% then commercial banks can set deposit rate with a 3% mark-up to a deposit rate of 27%. Now to lend the money out the commercial bank can put a mark-up of 10% to 37% lending interest rate.
Now imagine if the RBM bank rate dropped to 5%, deposits interest rate would drop to 8% and lending rate would drop to 18% assuming the same level of bank spread. This shows that commercial banks just put a mark-up on what RBM rate is, roughly speaking. This is how we can stimulate investment in this country. At these low rates a small business start-up (SME) has an increased chance of survival to produce more goods onto the market. The more the goods supplied the lower the inflation. This prevailing high inflation is due to lack of investment due to high interest rate regime over the years. The SME will create jobs to help cut down unemployment from 21%. I am sorry Mr EChilima :), whereas I agree with most of what you have said I disagree with the assertion that the RBM could have “cut the bank rate more but since this is in line with inflation, this is the best they could have done”.
Consumption component in Malawi is negligible compared to the capital investment we are seeking that a low lending rate can stimulate. Even if it were signifcant, encourage commercial banks to lend more to businesses/farmers than to consumers in order to stimulate economic growth and supply of products. The decision to lower the RBM bank rate cannot be based on any historical evidence because the high rate regime over the years has caused so much damaged to the economy in terms of evidence of none performing loans.