Authorities—specifically the National Economic Management Committee chaired by the Minister of Finance, Economic Planning and Development—had set very ambitious monetary policy targets built around restraining inflation and taming exchange rate volatility.
The overall aim being to stabilise prices, which is a noble and excellent cause.
And so they targeted that come 2018, the country will have brought down inflation rate to single digit levels and boosted international reserves to six months of import cover from the current three months.
This would be historic if it can be achieved. But as is always the case in Malawi, we have built an enviable, but very disrespected reputation as folks who set lofty goals, design a beautiful roadmap for reaching that aspiration and—not to anybody’s shock—ignore or elect not to implement it; yet optimistically expect to reach our destination.
It is a curse, if we choose to dress our laziness and lack of focus in such robes that have left half the population in abject poverty.
Inflation rate—according to minutes of the Monetary Policy Committee (MPC) of the Reserve Bank of Malawi (RBM) is set to miss its budget target by several percentage points not just by the end of the calendar year in December this year, but also by the end of the fiscal year in June 2017.
All this throws out delusions of a single digit inflation figure by 2018. In his Budget Statement, Finance, Economic Planning and Development Minister Goodall Gondwe announced that the inflation target for the fiscal year ending June 2017 would average 17.4 percent.
While the RBM’s projection is that the inflation outturn for December 2016 would be 25.4 percent, Gondwe’s fiscal year target is not attainable.
With the number of people needing food aid seemingly increasing every day, the general rise in prices can only get worse.
And that is when Malawians will start experiencing worse economic pain than they are already enduring.
The following paragraph from the MPC statement should send chills down your spines: “…the Bank will continue to maintain a tight monetary policy in order to arrest second round effects from the rising food inflation and ensure that inflation remains on a declining trajectory during the second half of 2016. The Bank’s communication strategy and interaction with stakeholders will continue in order to manage inflation expectations.”
What the RBM is saying is that they will use all the fire power they have in their monetary policy tool box to try—very unsuccessfully over the past few years—to achieve price stability or in simple terms, achieve predictable inflation levels and also lower it.
One of the tools in that monetary policy war chest is the policy rate, which is the central bank’s favourite tool for arresting inflation, describing it as “the bedrock of monetary policy.”
Well, so far it has been the most intimidating noose around the necks of businesses and households because it largely translates into high interest rates.
So, when Governor Charles Chuka and his team say they will pursue a tight monetary policy stance in the face of an inflation scare, they are basically saying they will be raising interest rates to discourage borrowing and, consequently, the growth of money supply in the economy.
So, if you have a loan at the bank, brace for higher repayments soon. If you are a business and want to borrow for operations or expansions, start thinking about how that could affect your cash flows and even pricing approaches for your goods and services.
And if policy rate raises are reinforced by higher Liquidity Reserve Ratios (LRR), then you should know that there will be even less money for banks to lend you because they have to deposit a bigger chunk of their capital (which they lend to you) with the central bank.
That may bring a cash squeeze among banks that may lead to higher interbank rates and the so-called Lombard facility that enables the RBM to lend money to banks at interest rate that is “two percentage points above the policy rate”, a cost banks traditionally pass on to borrowers.
It is a cycle so vicious that its constant bites are likely to bleed the economy into the comma some call recession.
And we are so near it now. n