Implications of increase of bank rate on Malawi’s economy

Reserve Bank of Malawi (RBM) last week increased the bank rate from 16 percent to 21 percent to curb galloping inflation on the back of the recent devaluation of the kwacha, a move that has created winners and losers in the economy, the biggest loser being government.

RBM Governor Charles Chuka said the central bank  increased the bank rate  after taking into consideration  “rising inflationary pressure on account of a number of factors, including the recent adjustment of the kwacha exchange rate and remaining exchange rate risks, the continuing excessive monetary growth as well as increasing interbank market rates as a result of the tightening of liquidity in the banking system.”

Heading the pack of winners are bankers, like hawks and vultures saw this coming and are now rubbing their hands in glee in anticipation of super profits as they prepare to pass on the burden of this increase in rate to new customers. They may not pass on the entire load but some of the increase will definitely be passed on.

Chuka: High lending rates

The policy rate is used as a basis for bankers to slap interest rates on mortgages, personal loans, car loans and loans companies use to expand their business. Any hike will therefore see borrowers shell out higher Equated Monthly Instalments (EMI).

The monthly instalment of a loan, which is calculated, based on loan amount, time and rate of interest goes up or down when one of the factors changes and in this case higher interest rates will bite the consumer.

At 13 percent in July 2011, the cost of borrowing form a commercial bank was cheaper but now a year on at 21 percent borrowers will flinch before signing the paper work and yet the banker will smile because for every loan he dishes out the return will be higher, especially for those that do not constantly dash to the central bank to beef up their reserves.

Rates

But one an economist with one of leading banks in Blantyre told Nyasa Times In the event of increase in loan rates, the banks may either choose to increase monthly instalments or they may increase the tenure of the loan.

“Generally, banks choose to increase the tenure of the loan to avoid paper work and to reduce default rates. If banks increase monthly instalments on existing loans people and companies would default and that would be bad for business and the economy in general.In any case banks will cushion themselves and will not lose out,” the economist said.

Joining the pack are savers, who will see interest rates on their deposits go up as bankers try to attract more long term savers to channel their resources to short term borrowers who will then be hammered with higher interest rates.

 Impact

Government will lose out both in sluggish economic growth as companies scale down operations on escalating cost of doing business, thin corporate tax from the business community and amass huge interest if they borrow on the market.

“Most companies in Malawi rely on bank loans to expand their business and if the cost of borrowing goes up they reduce production and in extreme cases end up firing workers,” commented Rafik Osman an Asian from Malawi based in Leicester United Kingdom.

He said the interest rate hike has come at a wrong time as the business community are still grappling with the impact of the recent devaluation.

“Government should not just be following text book economics they must look at the needs of the grassroots businesses and interest hike is not one of them,” he said.

He added that in United Kingdom the Bank of England, despite surging inflation and the negative economic waves of the euro zone has maintained the bank rate at a lower rate to allow business to grow and create jobs.

On July 5 the yield on 91 Treasury bills had jumped from 15 percent to 15.74 percent meaning the cost of borrowing on the part of government has increased and the private sector will soon be crowded out as they cannot compete with the government for cheap source of loans.

Indicators

Looking at the macro and micro economic indicators on the ground, it is clear the central bank will increase the base rate further should inflationary pressure persist.

“If I were in Malawi now I would stay clear of adding a new loan unless absolutely necessary. If I were running a company I   control,  expenses should be controlled,” Osman advised.

Adding that the situation may be difficult in Malawi where there is little competition among commercial banks and the level of disposable income is generally low.

Light

But Clever Ngwalo, a retired secondary school teacher  said government should be applauded for taking bold economic steps that would raise the living standards of people in the long term.

“The problem is that the previous government failed to take economic decisions that would propel this country out of economic shackles they were playing politics’ with the lives of Malawians,” Ngwalo said

He said it would be painful at first but as the economy picks up people will enjoy the fruits of these sound economic policies.

“The president has won the support of the international community, we have abandoned the so called zero budget, I see light at the end of the tunnel,” Ngwalo said.

The move to raise the bank rate—the rate at which commercial banks borrow from the central bank—comes almost a month after the rate was raised by three percentage points, or 23 percent, to 16 percent from 13 percent on May 11 soon after the 49 percent devaluation of the kwacha on May 7.

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