Rarely these days do we read our newspaper without coming across a reference either to the interest rates or inflation. Interest rates are prices for borrowing capital from financial institutions. Inflation is the general and continuous rise of prices throughout an economy.
Is a low rate of interest rate good? It depends on what we value most out of the economy and it depends on whether we are thinking of consumers and borrowers or lenders and savers.
Most governments, both in developed and developing countries, prefer lower to higher rates of interest. Low interest rates mean cheap credit for both households and businesspeople. When interest rates are low, household (families) can borrow money from banks to buy cars, to build houses and enjoy a few luxuries.
Low interest rates encourage businesspeople to borrow capital and invest in new projects or to expand the existing ones. Such action contributes to the growth of the economy and the creation of jobs.
We understand that one of the strategies of the Far Eastern Tigers was for the government to identify few key industries for support. This support took the form of compelling banks to grant loans to such industries at lower interest rates than the market rates.
What is good for borrowers and investors is not always good for lenders. A low interest rate brings advantages to borrowers at the expense of lenders. The other name for lenders is savers.
It is those people who do not spend all their current earnings on the consumption of goods that have finances to spare; hence, become lenders. We are all lenders when we deposit our incomes with banks. When interest rates rise, our savings generate more income, when interest rates fall, our savings bring us less income.
The rise in interest rates is a boom to savers only in conditions where general prices of goods fall. If prices rise faster such as during double digit inflation, the gains made by interest rise are wiped out.
The present macroeconomic situation in Malawi is extra problematic. Neither inflation nor the bank rate declines low enough to put it euphemistically. High central bank rates are intended to contain inflation by discouraging excessive borrowing. Where inflation is due only to excess liquidity in the economy, rising short-term interest rates can slow down its upward trend. If the inflation is due to shortage of goods and services, the bank rate yields immediate results.
How important is the interest rate to the level of investment? Suppose interest rate falls from 20 percent to 10 percent will there be a rush of businesspeople to borrow funds for new projects or expanding the existing ones?
This will depend on what Keynes called the marginal efficiency of capital. This term is not much in use by modern economists. It simply means on the rate of earnings by capital, in some projects the cost of borrowing capital (interest cost) is much less than the cost of rentals and labour. Even if the rate of interest has fallen, if rents and wages have risen at the same time, borrowing funds from banks is not attractive.
The level of taxes and political stability are also decisive in borrowing. Companies will not invest in an economy where taxes are punitive. A business is there to earn profits for its shareholders. If the profits are heavily taxed, the investor is discouraged.
However, cheap bank credit does not necessarily mean investors will borrow funds to start projects as other factors need to also be taken into consideration. Where there is political uncertainty, instability, violence and where workers engage in intermittent strikes, investors will not borrow funds to start any projects.
For the past two or three weeks, it has become very difficult to buy bales of flour from our Blantyre supermarkets. I am surprised that those who often speak for consumers have been rather reticent. How has this shortage come about and when is it coming to an end?
I heard a few ordinary citizens saying the shortage has come about because the President is taking the maize from where it is stored and is distributing thousands of bales to people in villages free of charge.
I have a grudge against those who receive bales of grains, provided they exchange them with their labour. It is not in the interest of self-respecting families and a nation that wants to develop faster to give away food free to able-bodied men and women.
Random distribution of food nurtures the dependency culture. Malawians ought to be imbued with the spirit of self-reliance.