Prevailing high interest rates in the Malawi’s financial system have been cited as one major contributing factor to the contraction of Malawi’s manufacturing sector last year.
According to a latest government annual economic report prepared by Malawi’s Ministry of Economic Planning and Development, the sector shrunk by 1.3 percent in the year 2012, compared to a growth of 2.1 percent registered in the preceding year of 2011.
“The decline [in the manufacturing sector growth] is a reflection of challenges, mainly experienced in the first half of the year, including high interest rates, scarcity of foreign exchange and fuel shortages,” reads the economic report in part.
However, on one hand, the Reserve Bank of Malawi (RBM) monetary policy stance to hike the bank rate — the rate at which commercial banks borrow money from the central bank as a lender of last resort — thrice last year alone has seen commercial banks charging their lending rates as high as 55 percent on the market, which has worsened default rates among most businesses and stifling private sector borrowing and investment.
RBM, in a response to the current commercial bank rates, termed the high rates as unjustifiable, as RBM did not raise its bank rate and maintained it at 25.0 percent when commercial banks raised their rates.
RBM’s spokesperson Efford Goneka said the central bank’s action not to raise its rate was to indicate to the market that the move was unjustifiable.
The current high interest rates are stifling businesses that depend on bank loans and have created panic even to individuals that took personal asset loans as they are being forced to pay double of the expected repayment.
And Chancellor College economist Ben Kaluwa said in an interview Tuesday that as long as government’s borrowing appetite grows, interest rates in the commercial banks will remain high.
Kaluwa said: “As long as government is borrowing through Treasury-bills, the commercial banks would opt to let government borrow at such an exorbitant rate than lend money to ordinary people.”
However, during the presentation of the 2013/14 budget on Friday, Finance Minister Ken Lipenga maintained that Malawi economy is set to grow by 5.0 percent this year.
“In addition, manufacturing is also expected to increase on account of higher tobacco processing and fewer production bottlenecks related to fuel and foreign exchange problems,” said Lipenga.