NBM cautions on fiscal slippages
National Bank of Malawi (NBM) has warned that the combined effect of the tight monetary policy and weak fiscal performance will likely maintain the high interest rates and inflationary environment for some time.
The Malawi Stock Exchange (MSE)-listed largest bank by assets and profitability, in its economic newsletter for April 2013, said this has also resulted in the private sector being crowded out, thereby stifling growth of the goose that lays the egg.
But inflation rate for March 2013, according to the National Statistical Office (NSO), has eased by 1.5 percentage points to 36.4 percent from 37.9 percent largely on account of the availability of cereals in some parts of the country.
Despite that, the non-food inflation has gone up due to upward adjustment in the price of fuel and its derivatives, the NSO said the “impact on overall inflation has largely been offset by the decline in food inflation”.
Reads the banks newsletter: “Fiscal slippages and lack of adjustment on the part of government have led to an increase in Treasury bills [T-bills] rates which are now over 40 percent for all tenors. Commercial banks have, therefore, been forced to increase their base lending rates from an average 35 percent to 40 percent to curb arbitrage profit opportunities whereby some customers can borrow from the bank and earn a decent margin by simply buying Treasury bills.”
The commercial banks have broken the tradition of waiting for the RBM to effect a hike in the bank rate—the rate at which commercial banks borrow from the central bank—before they adjust their base lending rates.
Currently, the bank rate is at 25 percent since December 2012.
During the T-bills auction last Tuesday, the 91 days T-bill rate decreased to 41.87 percent from 42.08 percent, whilst the 182 days rate increased to 43 percent from 42.19 percent and the 364 days rate decreased to 39.99 percent from 41.57 percent in the previous auction.
But NBM said the day to day monetary policy conduct is signalling to commercial banks to exercise restraint in the provision of credit.
To starve the market of liquidity, said the bank, the monetary authorities are introducing unplanned measures around the lender of last resort function to force commercial banks to tighten and significantly lower credit.
The bank said albeit effective in achieving the objective, adhoc administrative limits on access to the discount window and the not so transparent changes of rules on a day to day basis is rendering liquidity management within commercial banks an almost impossible task.
“These adhoc measures which can vary from day to day are imposing an inefficiency cost within the financial system ,including mispricing of financial products,” said the bank.
RBM data shows that discount window borrowing averaged K13.9 billion (about $34.7m at current exchange rates) per day last week, an increase from K10.1 billion (about $25.2m) per day in the week before.
On the other hand, borrowing between banks averaged K0.9 billion (about $2.2m) per day, increasing from K0.7 billion (about $1.7m) per day in the previous week with total daily borrowing averaging K14.8 billion (about $37m) per day in the week.
