In this second and final instalment of his interview with Reserve Bank of Malawi Governor Wilson Banda, Ephraim Munthali tackles banks’ super earnings from non-interest income, misalignments in the foreign currency markets as well as money and capital market developments. He also discusses some technical issues around government’s talks with the International Monetary Fund (IMF) for a new economic programme, the Extended Credit Facility (ECF); excerpts:
Q: I have noted significant volumes of non-interest incomes from charges/fees, but especially from forex trading, by commercial banks in a country where the Malawi kwacha/United States dollar exchange rate has been relatively flat and with dwindling forex reserves. Is that a concern for the central bank?
A: Yes, it is a concern. If you recall, sometime last year, we engaged all commercial banks and asked them to review their non-interest income. We asked them to review their charges and their fees so we asked them in some cases to reduce those fees such as automated teller machine [ATM] charges when people are using their ATMs; charges they were levying on bouncing a cheque, for example, and those charges also extended to foreign currency operations. I know that the level of foreign reserves have not been too high in the country, but if you look at commercial banks, they are sitting on very comfortable levels of foreign reserves, these are Foreign Currency Denominated Accounts (FCDAs). Commercial banks are sitting on close to 1.5 months of imports that is close to $400 million, which is in FCDAs so they can buy and trade using that foreign currency, so they do have the reserves that they can play around with and that is where they have been making their money. But as a central bank, we have said we were going to check on their level of charges because they have been making unnecessarily too much money on those operations at the expense of their customers. So, yes, we have reined in on them. Currently, we have said to them that if they are going to engage in any adjustment in any of those rates they have to come to us so we sit down, we discuss with them and we agree with them that this is reasonable or this is unreasonable, so if you notice from November last year, banks have reduced quite drastically most of their charges and fees and these extend now to foreign currency operations, so in the coming year, I don’t think you will be seeing those huge amounts you have been seeing anyway hopefully.
Q: The exchange rate spread between the official rate and the rate banks use for cash forex transactions on one hand and the street value on the other is very large, in double digit percentages actually. What does this mismatch say about the real value of the kwacha and the exchange rate policy being pursued at the moment?
A: Let us compare like with like, apples with apples, oranges with oranges. You find that when you look at TT (telegraphic transfers) rates, which are what obtains in the central bank, you find that they are roughly at around K825, K830 and then you go across in the commercial banks and buy forex, if you buy cash, it will be K1 000 something, so the cash rates and the TT rates are different all the time, but what is worrying now is that the gap between is abnormally huge. Currently, when you look at the TT rate and the cash rate, the difference I think is somewhere around 25 percent. I think that is the spread. In the event that you increase the supply of cash dollars in the market, you find that those two tend to converge, but not exactly the same, but there is a convergence, so I would say that the current spread in the market is likely a reflection of the fact that cash dollars are not in the right amounts, there is a supply shortage. But does that signal an underlining mismatch? I would not say strongly, yes, because as I said earlier on, we know that there should be a re-alignment on the exchange rate. By definition it means that there is an element of mismatch, but the element of mismatch is not to the extent that is shown by the difference between the cash rate and the TT rate. We are hoping that as the market progresses for tobacco and other things that improve forex supply, that gap is going to close and more so when we get into a programme with the IMF and the fundamentals are corrected and we have a tight monetary policy, we have a tight fiscal policy, we do think that that is going to be self-correcting.
Q: From various Treasury Bills and Treasury Notes auctions, it seems government is struggling to raise enough funds and appetite is continuously growing. Auction allotments versus announcements show significant variations in the past 12 months, with lower amounts of funds being raised. Is this a concern to the central bank and what are the implications on funding to government?
A: A couple of things. There are issues of seasonality—demand for cash in the economy is high right now because of the marketing of tobacco and other crops, but it could also be due to the fact that tightening of monetary conditions in the past has left us with a situation where there is very little money out there that can be invested in new demand as it were. Government is looking for fresh money, the money may not be there because monetary policy in the past has taken up much of that cash, but also because the economy has not been growing that strongly; money has to be generated, so if the economy is not generating that wealth then there is no money to mop up, so it could be a combination of all those factors I have referred to. There are issues of seasonality where the demand for cash is very high, there could be an issue of a weak economy thus wealth creation has not been strong and it could also be a reflection of the fact that monetary policy in the past has mopped up quite a lot of that liquidity already.
Q: In other countries, there are specific regulators for capital markets, pensions industry and insurance while here in Malawi it is all under the central bank. Isn’t RBM overwhelmed by the growing financial market? If you look at what has happened with one of the local portfolio and investment management institutions, which obviously fall under RBM supervision, one can be forgiven for thinking this is a reflection of possibly more attention being placed more on bank supervision than on other industries despite their growing importance. A case in point: assets under management are over K1.6 trillion; bank assets maybe nearly K2 trillion or thereabouts. Governor, is the RBM overwhelmed?
A: Let me start by saying that in terms of resources, especially human resources, I think the central bank is better resourced than most institutions in this country. We have highly trained people, we have the numbers. But true, the market is growing and true, the complexities are getting even more challenging. But with our human and financial resources available to us, we have tried as much as possible to cope with the growing demand. It is true that in other countries you have different or separate regulatory institutions for most of these things—pension funds, capital markets etc., but to set up those institutions is costly and as a country, we had to decide: should we set up separate regulatory institutions to carry out those different mandates and carry with them all the baggage of capitalisation etc. or should we, in the interim, allow the central bank to carry out those activities? We think that in the short-term, the central bank should carry out those services to provide that support to the market…medium to longer term those will evolve into separate institutions. I agree with you, I know that in my first term in the bank I carried out a study on capital markets and developments in countries that are fairly developed and they have these institutions and it was very clear that you need to have a separate regulatory institution to carry out those. But coming to Malawi it meant government investing in those institutions. When we did the cost benefit analysis we decided that in the short-term we should settle for departments in the Reserve Bank to carry out those functions, [but] long-term that will evolve into a separate institution, so in an ideal environment, yes, we will need separate institutions. Even coming closer home, issues of monetary stability and financial stability in some countries are carried by two separate institutions. The central bank will obviously be looking at monetary stability and then there would be a different institution looking at financial stability. At RBM we do both, we combine.
Q: When you look at the technical issues that you really have to thrush out with IMF to secure the programme, which ones do you see as probably the most difficult to reach an agreement around and why?
A: The most difficult issue is debt, external debt in particular. When we came into office, we found a huge amount of debt. Currently debt-to-GDP ratio is 56 percent. You could argue that in a regional context that is not too bad because some of our neighbours’ debt-to-GDP ratios are above 100 percent, but our challenge really comes in in servicing that debt. If you look at our debt service vis-à-vis our capacity, that is, our export earnings that we generate through export, that ratio is very, very high and it is unsustainable so that is really a major issue for us and this is something that we have been discussing with the fund and we are trying to find a solution around it. If I may take you back to our discussions with the fund, there are essentially two or three issues that we really had to find solutions to. One obviously we had to make sure that our macroeconomic framework does hang together by looking at monetary policies, fiscal policies and the like; that there is a budget that can be financed without creating inflation. But the other issue that we have to deal with is that debt servicing for Malawi is very high, it is unsustainable, and so we really need to find a solution to it. Short term solutions include, one, restructuring that debt, but secondly, on a longer term, we need to build capacity to service that debt and that capacity has to come from export growth and development.