Malawi inflation up, interest rates up, economy gloomy, uncertainty everywhere

The minutes from the meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of Malawi (RBM) held on the 3rd of December 2012 makes a very grim reading and offers little or no hope at all to millions of Malawians who are currently mired in economic hardships.

At a time when everyone else is cutting interest rates in order to attract investments and boost private sector spending, the Malawi officials have decided to increase them. Apparently, the main aim of the meeting was to “review recent economic developments and decide on the monetary policy stance necessary to contribute to government’s efforts to realize the objectives of the economic recovery plan (ERP)”.

Much of what the MPC discussed such as deteriorating macroeconomic environment, rising inflation (from 28.3% in October to 30.6% in Nov), faster depreciation of the MWK against major currencies and a very thin import cover of USD142.7million (0.8months)  is not much of a surprise. However, what is most surprising are the measures adopted by the committee in order to reverse and correct the grim situation that has gripped the Malawi economy. Simply put, the Malawi economy is in tatters.

From the minutes, it appears that the main focus of the meeting was to design measures that will curb the runaway inflation that has rocked the country. The first measure adopted by the MPC to arrest the food component of inflation is “to expedite food redistribution”. One wonders how this will arrest food inflation since it is not only the maize/ufa that is needed by Malawians.

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Unless we are going to start distributing other food items such as “bonya”, beans and masamba, inflation arising from the food component will keep on rising. This measure is bound to fail , more so given the fact that the next few months is a lean period for Malawi agriculturally. The second and not only most strange but bizzare too, is the decision to increase the bank rate by 400 bps from 21% to 25% while maintaining the Liquidity Reserve Ratio at 15.5%. Compare this to our neighbours in Zambia whose MPC decided to maintain their policy rate on the same day as the Malawians at 9.25%. Far away in the Pacific ocean, Australia decided to cut its rates by 25 bps to 3%.

An increase in the bank rate is usually used to mop up excess liquidity in an economy. According to the MPC, the year on year money supply in the Malawi economy grew by 2.8% to September 2012, largely bolstered by private sector credit (13.8%).

Funny enough, this measure has been adopted when the main component of the inflation increase is the food constituent, accounting for 83.4%. The MPC’s reasoning here appears not only to be muddled but clouded with other factors that go beyond economics. Simply, the decision is illogical and it does not make economic sense.

If food is underpinning over 80% of the increase in the runway inflation, 6 times as much as private sector credit, how come interest rates have been increased by 4%? Did the MPC really need to tamper with interest rates in an environment where credit is very scarce? How effective is this measure in curbing overall inflation increase? Surely a growth of 2.8% in the Money supply does not require a 4% increase in the bank rate, especially so when the main culprit in inflation rise is not private sector credit but food inflation.

The central bank needs to seriously think on how it can rescue Malawi from the economic abyss. We cannot afford as a country to be mediocre in our approach to this enormous task that lay in front of us. Malawi needs investments both from within and without. But how are we going to attract investments from abroad when our interest rates are not competitive? Why would a foreign investor choose to invest in Malawi where interest rates are around 30% when he knows in Zambia or Kenya he can get single digit rates? Our problems are big and they need seriousness in tackling them.

The RBM must start looking at ways on how it can reduce interest rates while keeping inflation low. We need to seriously look at our supply side. We need to increase this base as it is currently very thin. Attracting investment through low interest rates will result in this side of the equation increasing. RBM should not always take the easy way out of tampering with interest rates/monetary policy when it sees inflation rate running away.

This is simple and cheap economics that will not solve our problems. The tragedy in all this is that it is the poor people in the streets and the villages who are paying highly for such incompetent decisions. One wonders if we indeed have economists among our midst. Indeed the Malawi of today, inflation is up, interest rates are up, the economy is gloomy, business confidence is very low and there is uncertainty everywhere.

But not all hope is lost. We are a resilient nation, and we can turn things around, we only need to put our minds into it.

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