Economic recovery and Reserve Bank of Malawi’s monetary policies

Monetary policies are instruments used by the central bank to manage and control the economy. These instruments are in form of interest rates and credit creation facilities that can either be tight i.e. high interest rates or loose i.e. low interest rates. Monetary policies work collaborative partnership with another form of government intervention into the economy which is fiscal policy.

Fiscal policy is an instrument used by to central government to manage and control the economy and uses two tools: taxes and government spending. Just like monetary policies fiscal policies can either be tight i.e. high taxes and low government expenditure or loose i.e. low taxes and high government expenditure.

Both the fiscal policies and monetary policies are instrumental to the Economic Recovery Plan (ERP) that the Malawi Government is currently implementing to save the country from the present economic dungeon. Interest rates are vital in the promotion of investments which is the engine of economic growth as they help firms borrow capital from commercial banks and invest in the economy.

As I am writing the Reserve Bank of Malawi lends money to central banks at a rate of 25% and in turn commercial banks lend the same to firms and individuals at about 45%. There are some banks whose interest rates are a high as 47% all owing the RBM’s high interest rate of 25%.KWACHA

The maintenance of interest rates by the Reserve Bank of Malawi at 25% is rhetoric to the much touted Economic Recovery Plan. The fact that commercial banks borrow money from RBM and lend to firms and possible investors at 47% pauses huge adverse effects to the ERP. It is sheer irony for the government to dream of recovering the economy when investment is being suppressed by the high interest rates the banks are offering.

At 47% commercials bank are as guilty as the local lending systems of mwala ku mwala where locals lend money at 50%. It is evident here that the central bank’s monetary policies are in sharp contradiction to the central governments policies to recover the ailing economy. It is naivety to think that economic recovery should be measured by appreciation of the kwacha without a subsequent reduction in general level of prices and inducement of investment in the economy.

As investment continues to be suppressed at the high rate of interest RBM is offering commercial banks, this goes further in affecting the Malawi Economy by plunging it into a state of disequilibrium that is characterised by severe unemployment and under-employment. It is incomprehensible how government continues to nurse ambitions of recovering the economy when it is eminent that the problem of unemployment this country is groaning under is the resultant effect of discouraging investment by maintaining central bank’s interest rates at 25%.

Instead of adjusting interest rates downwards to encourage investment and create jobs, government continues to parade in sheer myopia by ignoring the power of investment in job creation. As a means of creating employment in the country government dreams of exporting youthful labour to South Korea though the deal is groping about in misty state.

As if this is not enough, RBM’s tight monetary policies have subjected the Malawi economy to underemployment which has consequently reduced consumption. Firms are finding it tough to boost their investments and increase salaries of staff to cushion them from the effects of the devaluation. As a result masses are surviving on meagre salaries and low disposable income. Subsequently this has reduced consumption and makes the entire ERP a wishful thinking that can not be realised by ignoring one of the engines of the economy- investment.

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