The year 2024 was one of the toughest for businesses and consumers and getting a loan from financial institutions was expensive.
In the face of intensifying inflationary pressures, the Reserve Bank of Malawi (RBM) has kept the policy rate, the key driver of interest rates on loans, elevated as a control measure.
Earlier in the year, the central bank raised the benchmark policy rate by 200 basis points to 26 percent, effectively raising the cost of borrowing.
In the course of the year, the central bank maintained the policy rate at 26 percent as inflation pressures remained elevated, reaching an 11-year high of 33 percent in 2024.
This is far above the RBM target of five percentage points and higher than the 27 percent projected by the central bank in March 2023.
The hike in the policy rate compelled commercial banks to raise their interest or lending rates to around 25 percent. Commercial banks were, therefore, charging as high as 35 percent, depending on the risk profile of the borrower.
Consumers Association of Malawi executive director John Kapito said in an interview that the elevated policy rate put a heavy toll on borrowers and consumers who are still reeling from the negative impact of the 44 percent kwacha exchange rate re-alignment in November 2023.
He said: “It will be a big challenge now because most of our traders borrow money from the banks to buy goods. There will be trouble on the market. Money will be tight.”
Market analyst Cosmas Chigwe observed that for entities and individuals that are already servicing loans, this presents a difficult challenge as most repayment projections will not have taken into account high interest rates.
He said: “We are, therefore, likely to see an increase in non-performing loans in the commercial banks. If one is borrowing at 35 percent, what kind of business would you have to be doing to achieve a return that covers this plus some retained earnings?”
Chigwe said innovative solutions such as private equity funds should spring up to provide alternatives to debt financing.
In its policy and inflation brief in November last year, Malawi Confederation of Chambers of Commerce and Industry (MCCCI) said the relationship between inflation and policy rates is closely intertwined, with interest rates serving as the primary tool for managing inflation.
By raising the policy rate, the central bank seeks to reduce the money supply in circulation, subsequently curbing demand for goods and services.
Reads the brief in part: “Moreover, higher interest rates impact businesses not only on the consumption side, but also influence investment decisions due to increased borrowing costs.
“This elevated cost of loanable funds constrains businesses from investing in new machinery, inputs and infrastructure.”
MCCCI observed that while the monetary policy committee views raising the policy rate as a key tool to combat inflation, it is necessary that the monetary policy measures complement fiscal policies aimed at enhancing food production and managing exchange rates.
In 2023, despite a 600 basis points increase in the policy rate, headline inflation surged to 34.5 percent by December 2023 from 25.9 percent in January 2023.
The predominant drivers of inflation were food inflation throughout the year and the immediate impacts of currency devaluation in the subsequent quarters.
Said MCCCI: “This underscores the significance of addressing supply-side factors alongside demand-side interventions.
“The tightening of monetary policy will inevitably raise borrowing costs, impacting business operations and growth prospects adversely. Lastly, the efficacy of the policy hinges significantly on the government’s fiscal stance in 2024.”
In an earlier interview, RBM spokesperson Mark Lungu observed that monetary policy alone cannot solve the current inflation challenges, adding that they are a combination of many factors.
He said: “The environment in which we operate has significantly changed. Of late, economies, including Malawi experience a number of exogenous economic shocks from rising commodity prices to weather induced shocks.
“As such, inflation sources have also multiplied. This is the reason there is need for collaborative efforts from all key players to ensure we insulate the economy from these shocks.”
Lungu said the central bank has at its disposal monetary instruments, which are effective in managing demand side of the equation.
In its recent Monetary Policy report, RBM projected that annual inflation will be at 33.5 percent this year from 28.8 percent last year.
Inflation was recorded at 27 percent as of November last year, according to the National Statistical Office.
