Malawi for tighter fiscal policy

The Reserve Bank of Malawi (RBM) plans to further tighten the monetary policy to achieve low inflation rate next year, a feat that could result in lower interest rates, Governor Charles Chuka has said.

The rise in general level of prices of goods and services is at 25.2 percent as of July 2013, according to the National Statistical Office (NSO), and the bank rate is at 25 percent, held there since December 2012.

Commercial banks’ interest rates are hovering at around 38 percent, from a high of over 40 percent when the liquidity squeeze was at its peak.

Currently, the price of maize which, as part of food, accounts for 50.2 percent of the Consumer Price Index (CPI)—a measure that examines the weighted average prices of consumer goods and services—is trending upwards.

It, however, remains to be seen what balancing act the central bank will use to achieve a low inflationary environment when food prices are rising.

To achieve this, Chuka told bankers at their annual dinner and dance in Blantyre on Friday, that he has sufficient forex reserves and has a target of two months import cover, about $366 million (K128 billion), by end of this year.

“I have enough muscle at the moment to make sure that no one tries me with the kwacha. I do need to ensure that the kwacha stabilises throughout this period [lean period] and all the way to next year so that fuel prices don’t keep on rising too much,” he said.

Last year, after the 49 percent devaluation of the kwacha and its subsequent floatation, banks started clearing a backlog of external payments by most importers resulting in wiping out of liquidity on the market hence liquidity squeeze—a time when cash resources to meet depositors’ demands were in short supply.

Thereafter, the banks started flocking to the RBM for liquidity, prompting the central bank to introduce a non-collateralised discount window borrowing from June to September 2012, extending billions of kwacha to rescue distressed banks.

But Chuka warned the banks to be careful as they will not get liquidity from the RBM this year, saying the “unit of discount window that you overused will not necessarily be open”.

“Last year, we had the intention of keeping the banks afloat because we knew what they had gone through. They had gone through a lot, and they have done a lot of work. I don’t intend to do that this year, and there is no printing of money to keep the banks afloat,” he said.

Turning to the banks, Chuka warned them not to play around with the kwacha, saying the central bank will be watching which bank is playing games and that the RBM will go after its balance sheet to examine it.

He said monetary policy takes longer to be effective and they are focusing on the next 12 to 18 months to have a steady economy and a stable kwacha.

“Financial stability this time will not be printing kwacha, it will be creating banks that will survive the turmoil of tomorrow,” said the governor, stressing there will be no policy reversal.

Bankers Association of Malawi (BAM) president William Chatsala said the banks now have all the reasons to smile and look to the future with optimism.

He said liquidity, inflation and interest rates are heading in the right direction.

Going forward, Chatsala said BAM will this year be preoccupied with four issues; Basel II rollout, financial literacy, increasing customer products and services and the National Switch in which all the banks will have a stake.

World Bank country manager Laura Kullenberg, who was the guest of honour, hailed the banks for their financial inclusion drive which has the potential to reduce poverty and financial inequality.

This year’s Bankers Annual Dinner and Dance was held under the theme, ‘the role of banks in financial inclusion’.