The Reserve Bank of Malawi (RBM) has attributed softening private sector credit to a weak macroeconomic environment and increasing public sector financing requirements.
In its March 2018 monetary policy report published on Friday, the central bank noted that private sector credit is responding to the relatively less tight interest rate position following previous policy rate cuts, albeit with a lag.
In terms of economic sectors, wholesale and retail trade continued to represent the largest share of outstanding loan stock at 27.6 percent while agriculture, manufacturing and community services constituted 25.7 percent, 19.2 percent and 12.1 percent, respectively of the credit stock.
RBM last month maintained its policy rate, also known as bank rate, at 16 percent as inflationary risks still persist.
Lower interest rates reduce the cost of borrowing which may help boost private sector activity, resulting in improved economic growth. It may also lead to higher property values as demand is increased by reduced mortgage rates.
Malawi Confederation of Chambers of Commerce and Industry (MCCCI) chief executive officer Chancellor Kaferapanjira said in an interview the private sector productive capacity has been strained, which also affected its loan payments.
“It doesn’t matter whether one aspect of the economic indicators is doing well, you need a package of factors. Power is almost non-existent for production despite reduced interest rates and declining inflation. As a result, firms that rely on machinery to make ends meet, are suffering.
“The private sector is failing to operate. We all know the interest rate is low, but we also know that it is also highly supported by artificial means like inflation. That is not helping in boosting the private sector, as a result, the productive sector is not paying loans,” he said.
During the review period, total loans of the banking industry stood at K453.9 billion as at end February 2018, representing a growth of 0.3 percent from K452.4 billion in January 2018 while non-performing loans (NPLs) ratio depicted an improvement to 15.7 percent as at February 2018 from 17.7 percent in February 2017, according to the report.
Fiscal developments up to March 9 2018 on the other hand show that the fiscal deficit has improved in the third quarter of 2017/18 fiscal year to K55.35 billion from K61.81 billion in the second quarter of the current fiscal year while at K189.93 billion, total revenues as of March 9 were closer to a quarterly projection of K223.19 billion.
Expenditures during the same period were recorded at K245.28 billion and remained within the quarterly projection of K286.72 billion.
The central bank has since painted a gloomy outlook for the agricultural sector in the year.
“Early signs suggest a slowdown in the agriculture sector in 2018 which will result in a slowdown in overall economic growth. The non-agriculture output has been improving on account of expansionary fiscal policy.
“The economy is, therefore, estimated to be in a positive cyclical position in first quarter in 2018 in view of positive non-agriculture output gap,” reads the report.