The Reserve Bank of Malawi (RBM) has played down fears of a possible inflation surge in view of the current money supply in the economy, saying rather it was an early sign of recovery in economic activity.
RBM spokesperson Onile Nkuna said this in context of a recent third quarter report issued by the central bank which shows broad money supply (M2)—a certain measure of the amount of money in supply in an economy— is growing.
Central bank figures show that the growth in M2 was underpinned by both narrow money (M1) and quasi money (QM) and) which edged upwards to 9.3 and 4.7 percentage points from 8.7 and 2.5 percentage points in the preceding quarter, respectively.
According to the figures, M2 recorded an annual growth of 14 percent compared to 11.2 percent and 11.6 percent in the second quarter of 2020 and corresponding quarter of 2019, respectively.
But in a written response Nkuna said the money supply growth reported in the quarter under review is expected not to be inflationary, rather is an early sign of recovery in economic activity.
She said the growth observed in the monetary aggregates during the period actually reflects a healthy and desired outcome, considering that the economy was struggling and; hence, low base of economic activity.
Said Nkuna: “Theoretically growth in money supply is inflationary but in this case during the third quarter of 2020, the growth in money supply was largely driven by private sector, which expanded strongly by K46.7 billion to K612.6 billion during the quarter.
“The surge in private sector credit growth reflects a pickup in economic activity mainly following easing of Covid-19 lockdown restriction measures in key trading partners.”
Weighing in Chancellor College economics professor Ben Kaluwa backed the central bank’s position saying while indeed rapid money supply is inflationary the money growth is largely signaling that more liquid assets are being traded than before for cash.
“This is a good development. It is a balancing act. I would not just look at money supply growth and the associated inflationary fears but look at the broader picture of key fundamentals.
“Stability of the currency are critical to inflation management given the impact on prices whenever rapid devaluations occur against these currencies occur,” he said.
During the fourth the Monetary Policy Committee (MPC) meeting, the RBM slashed the policy rate to 12 percent and maintained the Liquidity Reserve Requirement (LRR) ratio on domestic and foreign deposits at 3.75 percent and the Lombard rate at 20 basis points above the Policy rate.
This decision according to RBM governor Wilson Chirwa was aimed at supporting economic recovery.
Meanwhile the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) has indicated that this further reduction in the Policy rate will be looked at as a stimulus package for the private sector arguing that lower interest rates are important now more than ever for local businesses.
In its November economic report the chamber observed that businesses have incurred a lot of losses due to the overall decrease in global demand hence this is an opportunity for them to borrow and reinvest in the recovery of their business.
