A few days ago, everyone was delighted to receive news that commercial banks have reduced their interest rates subsequent to the reduction of the discount rate by the Reserve Bank of Malawi (RBM).
Well, whether the decline in the interest rates has been substantial or not, let us save it for another day. The joy about the news obviously has been attributed to the fact that the monetary policy would attract more borrowers of funds to flock to such financial institutions.
Consequently, despite that this may lead to an increase in the price in the short-term, the winning emphasis is on the increase in investment and reduction of unemployment rate the monetary policy would bring. In addition, in the long-term, this would increase production across the country and eventually increase the total output which in turn would bring down the price.
However, reading The Nation recently, my eyes were yet glued to another story that talked of government’s plans to issue a K20 billion two-year coupon bond. At that moment, I took a sigh. Then I reminiscently thought how happy I was after receiving the news of the decline in the interest rates. Then immediately I thought how these monetary policies will benefit an ordinary Malawian like me. I have to admit, I had a hard time reading that newspaper because every time I flipped a page, my mind was adhered to that same page.
In view of the above background, one has to pay attention to the availability of loanable funds if ordinary Malawians are to invest in businesses, or the so called ‘entrepreneurship gamble’. This is so because companies, including commercial banks, would rush to invest in Treasury securities rather than lending money to the people and earn a few returns owed to the decrease in interest rates.
Lenders would lend more funds as the interest rates rise, and reduce funds otherwise. The other advantage of investing in the Treasury securities is that there is some certainty unlike venturing in the lending business where there are challenges in recovering loans.
Furthermore, when government issues bonds through RBM, it means that it is borrowing from the economy itself. As a result, some companies may be crowded out as the government accumulates the funds that could have been lent to those companies.
In turn, this means fewer jobs would be available in the already ‘high unemployment hit’ country. As such, this negates the advantages of the first monetary policy where by the Reserve Bank reduced the discount rate. This will only force the economy to be moving back towards its previous position.
For instance, because there will be a decrease in money supply, demand for loanable funds will increase pushing interest rates up (the liquidity effect). Unfortunately, raising interest rates is not commonly advertised because banks want to be seen as performing well. This is done in the background where the ordinary Malawian dances to the tune. That is why they (banks) will rush to publish decreased interest rates in the newspapers so that customers feel their banks do whatever it takes in their best interest. But no!
Therefore, to wrap up this whole jargon of contrary monetary policies, I should stress my opinion on this matter of economic events that in the short-term few ordinary Malawians may enjoy the benefits of the aforementioned monetary policies.
However, the long-term benefits would be enjoyed by the wealth holders who will invest their funds in the capital market. With regards to that, as a member of the ordinary citizenry, I would prefer the former expansionary monetary policy to the latter contractionary monetary policy. The Keynesian proponents would best agree with that! n