Economist Chifipa Mhango worried with RBM’s policy lending rate hike: “May soon surpass highest levels in recent history.”
Following the announcement by the Monetary Policy Committee (MPC) of the Reserve Bank of Malawi (RBM) on February 1, 2024 to hike policy lending rate by 200 basis points to 26%, revered economist, Chifipa Mhango says the government should encourage a robust economic policy debate as the policy lending rates may soon surpass the highest levels in the country’s recent history.
The South Africa-based Don Consultancy Group (DCG) Chief Economist maintains that the MPC’s announcement to hike policy lending rate is “a cause of concern for business environment in Malawi”.
“Although the motivation to hike the policy lending rate are valid under the current monetary policy framework, the question should be whether such a policy is effective for the structure composition and patterns of the Malawi economy especially on how the Forex market environment is managed through Malawi kwacha devaluation and also how the Fiscal environment is managed with excessive Government borrowing.”
In his public notice issued on February 1, RBM Governor, Wilson T. Banda — who is MPC chairperson — noted that inflation pressures have intensified, and the inflation path is set to remain elevated above the 5.0% medium-term target.
“The outturn reflects the materialisation of most risks identified during the October 2023 MPC meeting,” says the statement. The Committee observed that the high inflation environment is not conducive for growth and therefore resolved that a monetary policy response is required to contain inflationary pressures and restore price stability.
“Therefore, the MPC resolved to raise the policy rate by 200 basis points to 26%. Further, the Committee resolved to maintain the Lombard rate at 20 basis points above the policy rate and the LRR ratio at 7.75% for domestic currency deposits and 3.75% for foreign currency deposits.
In his analysis, Chifipa Mhango says the RBM “has outlined the elevated inflationary pressures in the Malawi economy amid concerns of exchange rate re-alignment and also possible shortage of maize in Malawi due to anticipation of lower production that may lead to a price surge, as some of the key elements leading to adjustment in the policy lending rate from 24% to 26%”.
He noted that within a period of 10 months from April 2023, RBM has hiked the policy lending rate by 800 basis points, “meaning an 8% increase from 18% to 26%, as inflation rate continued to surge to reach the current 34.5%”.
“This has put Malawi as the fourth highest in Africa when it comes to policy lending rate of Central Banks, to which Zimbabwe, Ghana and Sudan are the top three in that order.
“What is clearly being depicted is that, despite the aggressive monetary policy approach by the RBM in hiking the policy lending rate to contain inflation rate, this is not being achieved, as inflation rate surges further in the Malawi economy.
“This raises questions around whether such an inflation targeting policy is effective in the Malawi economy where Government is the largest borrower and in a forex market which is managed through devaluation to suppress demand.
“If one looks back at statements from Malawi Government on devaluation and what the RBM portrays in its forex management, it may confuse the masses that are not enlightened on economic matters as to whether there is alignment, for Government position, is to encourage exports while the RBM aims at destabilizing the forex market with devaluation to supress demand.
“I, will, therefore, continue to ask for empirical facts that has or will demonstrate that for instance a 44% devaluation has led to, let’s say 30% increase, in export value for Malawi in a sustainable manner.
“However, what I know empirically is that devaluation of the Malawi kwacha is pushing inflation rate beyond the RBM medium target of 5%. These are elements that Malawians should be encouraged to debate upon.”
Mhango further said he was iof the view that if the current levels of high appetite to spend unproductively by Malawi Government is not addressed, “then the Monetary Policy environment in Malawi economy will continue to bear the pain into its business productive lending environment”.
“While at the same time, if the trade and industry landscape is not geared production for import substitution, as well as value added exporting, the forex market will bear pressure leading to more devaluation of the kwacha, which is an own goal towards containing inflation rate in the Malawi economy.”
“As Malawians, we ought to be enlightened on the fact that majority of the Malawi population are rural based, unemployed, and not formally banked — therefore, still not participating in the mainstream formal bank borrowing side of the formalised economy.
“This also raises questions as to whether hiking interest rates would really have a wider intended impact to limit monetary supply induced through borrowing which is inflationary in nature.”
Mhango continued to highlight the fact that the “Government is the largest borrower in the Malawi economy, and it will be surprising if even hiking the policy lending rate would discourage government borrowing, which has a strong unproductive spending appetite of almost above 80%”.
“Relates to the Zimbabwean economy, where the policy lending rate stands at 130% as per information sourced through the Central Bank (the highest in Africa), was at one time a strong economy with a strong industrial base to manufacture and export.
“A key lesson that it does not take long for such high interest rates to prevail in an economy if there is continuous mismanagement of the economy.”
In his closing remarks, the Chief Economist was of the view that the current RBM’s monetary policy framework — based on inflation targeting — “may not be conducive to the Malawi current economic landscape”.
“The current structure composition of the Malawi economy based on its trade and industry conditions, the management of the forex market through Malawi kwacha devaluations, the fiscal policy decisions and high unproductive spending appetite are not in a way supportive of the current RBM’s monetary policy framework.
“A monetary policy reaction that suits well-structured and industrialised economy, and a formally banked economy. There is a need for robust economic policy debates before we wake up to the realisation that Malawi policy lending rates are also the highest in Africa.
“A policy shift in monetary policy is acceptable just like what South Africa Reserve Bank did and recently the Tanzania Central Bank has done to suit the needs of the economy and align to the structural developments in the economy,” Mhango summed it up.
In its public statement, the RBM said based on an assessment of the macroeconomic situation and outlook, the MPC decided to increase the policy rate and the MOC resolved to maintain the Lombard rate at 20 basis points above the policy rate and the Liquidity Reserve Requirement (LRR) ratio at 7.75% for domestic currency deposits and 3.75 percent for foreign currency deposits.
“In arriving at this decision, the MPC observed that inflationary pressures have intensified, such that inflation is projected to persist before it starts to decline. The decision is, therefore, intended to counter inflationary pressures and restore price stability,” said the statement from the RBM Governor.
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