Economics Association of Malawi (Ecama) has advised the Reserve Bank of Malawi (RBM) to manage expectations on inflation which could rise as the bank releases the new K5 000 banknote into circulation in February.
In its newsletter for November 2021, Ecama argues that the introduction of higher denomination banknotes may have an impact on inflation rate currently at 11.1 percent.
Reads the newsletter in part: “When the issuance of higher denomination notes is interpreted by the public as an over issue of currency by the central bank, inflation expectations are elevated which could push prices up even though the money supply has not increased.
It observed that empirical studies have found a positive causal relationship spanning from inflation to higher banknotes and this has been attributed to the fact that issuance of higher denomination banknotes is triggered by the need to finance larger nominal transactions stemming from higher inflation and not vice versa.
Ecama has since cautioned the central bank to manage these expectations by properly educating the masses on the rationale of issuing the higher denomination currency.
The announcement of the introduction of the K5 000 banknote as the highest denomination triggered debate on inflationary pressures, among other issues.
University of Malawi economics lecturer Gowokani Chijere-Chirwa in an earlier interview argued that introducing a high note usually means that inflation is rising.
“The high note may mean that our economy is heading to the abyss of inflation,” he said.
In an earlier interview, Consumers Association of Malawi executive director John Kapito said the introduction of a K5 000 banknote speaks volumes that the economy is in bad shape and that the central bank is admitting that the kwacha is now valueless.
He said: “The moment we introduce such high value notes, it is an indication that your economy is really in turbulence. Inflation has hit us hard and that is the message from the Reserve Bank.
“If you carry K5 000 as a note in a shop, you can buy almost nothing. It is a big and long journey, but I think that is a clear and good statement about the state of the economy.”
But during the introduction of the higher denomination note, RBM Governor Wilson Banda argued that since the introduction of K2 000 note, there have been a lot of economic developments that have necessitated the review of the denomination mix.
He said: “Among other things, the policy guides that the highest value denomination should not account for more than 60 percent of the total value of currency in circulation.
“When that happens, the bank can apply a number of measures, one of them being introduction of a higher banknote denomination. In the present case, our highest value denomination, the K2 000 banknote, has been above the 60 percent threshold for some time and has hovered above 80 percent.”
Banda further allayed fears that headline inflation is currently out of hand, saying the rate of inflation is manageable.
Malawi’s year-on-year headline inflation rate for November 2021 quickened by 1.3 percentage points to hit 11.1 percent, triggered by a rise in food and non-food inflation.
RBM last introduced a higher denomination note of K2 000 on December 19 2016.
