Constant macroeconomic risks in a fragile economy and unpredictability of the exchange rate are among issues that make it difficult for local banks to finance long-term investment projects.
In a questionnaire response, Bankers Association of Malawi (BAM) chief executive officer Violette Santhe was reacting to critics on why banks are not taking a risk to finance investments in the energy sector where opportunities are huge to realise return on investment due to the prevalent high demand for electricity in the country.
Said Santhe: “In Malawi, many times it’s hard to tell what macroeconomic conditions will be like in the next six months. The level of capital required is high, which makes it very difficult for banks to invest in these projects. Secondly, it’s very difficult to simulate interest rates in the long term in Malawi due to constant changes in government policy on interest rate.”
She said as a result, banks prefer to finance short-term to medium-term projects. Most long-term projects have been exposed to exchange rate risks which were obtained from foreign banks.
According to her, based on the unpredictability of the macroeconomic environment and exchange rates, banks are of the view that long-term energy financing would be suitable for development banks, which finance huge long-term projects like hydro-electric power stations that need patient capital.
In an interview, Reserve Bank of Malawi spokesperson Mbane Ngwira dismissed the banks’ assertion about unpredictability of the exchange rates and macroeconomic issues as raised.
Said Ngwira: “If I were to take you 24 months back could you say there has been instability in the economy? Previously we could say the economy wasn’t that stable but for the past 24 months you will find that the exchange rate has been so stable at around K730 to a dollar and even the inflation has been coming down from August last year when we hit a single digit, so I don’t really understand what they mean.”
Ngwira emphasized that the authorities have tried very hard to stabilize the economy to ensure the prevalence of an economic environment that is conducive to investments in all the sectors.
On the banks’ concerns about the lack of information to predict the future Ngwira said the central bank has been providing information about the economic outlook in the near future to ensure banks and concerned stakeholders make informed economic decisions.n