It is official: Authorities run out of ideas as economy tanks

It looks clear that the Reserve Bank of Malawi (RBM) as well as the Ministry of Finance, Economic Planning and Development are fast running out—if they have not depleted already—of monetary policy instruments for saving and jump-starting the economy.

After years of letting the sharks on the money market dictate the Malawi kwacha exchange rate, RBM recently moved in to arrest the kwacha’s sharp fall by introducing measures that restrict authorised dealer banks (ADBs) from determining the day’s foreign exchange market price.

Thus, RBM directed that the exchange rate spread between buying and selling rates shall not exceed K5 for all trading currencies at any point.

That has meant that the daily movement of the kwacha would not go beyond K5 per day.

The central bank also issued limits on overall foreign exchange risk exposure as per Part III of regulatory requirements, reducing it from plus or minus 35 percent of the bank’s core capital to plus or minus 10 percent.

The idea was that banks needed to keep more foreign exchange. So far, it does not look like the efforts to save the kwacha from a steep fall have succeeded.

At the time of issuing the directives, the kwacha had, between July 1 and 29, fallen by around 12 percent against the US dollar from being sold at K453 at the beginning of the month to around K510 on the day the regulatory measures were issued.

Since the measure on July 29 the local unit has depreciated by a further estimated 10 percent and counting from the K510 to the dollar to the nearly K560 today even as the spread remains within the K5 band.

To help drive down interest rates, the central bank also tinkered with one of its monetary policy instruments—the Liquidity Reserve Requirement Ratio (LRR).

The RBM, which has for years clung to a tight monetary policy stance, tried to loosen it by halving to the reserve ratio to around 7.5 percent.

This did free-up the billions of kwachas in bank money that were locked at RBM through a 15 percent LRR rate.

That move resulted in marginal cuts to the base lending rates, thereby slightly reducing the cost of borrowing for consumers and investors.

Whether cutting the LRR rate while leaving the policy rate intact would be effective in driving down interest rates and encouraging borrowing for both consumption and production is another matter for another day.

But I can safely say it is too little too late although I appreciate Governor Charles Chuka’s cautious approach given the inflationary pressures coming from rising food prices, inevitable higher fuel prices and a depreciating currency.

The decline in the value of the local unit raises the kwacha price of imported goods as well as those products whose raw materials are imported, leading to inflation.

What else can the RBM do, especially with inflation having a northern mind of its own, ignoring the desirable southern instinct?

Governor Chuka and his crew have little on their disposal by way of monetary instruments to rejuvenate the economy. All they can do now is hope and pray, which is not an option considering the pain citizens are going through.

As for Finance, Economic Planning and Development Minister Goodall Gondwe, he missed an opportunity for bold measures in the just passed budget to use fiscal policy to pump some energy into the economy.

Those cuts to allocations, while understandable in the context of austerity with a Treasury ransacked by Cashgaters, deserted by donors, starved by an underperforming  Malawi Revenue Authority (MRA) on the back of a bleeding private sector as well as its own revenue collection inefficiencies, are not helping matters either.

Recently, Gondwe talked about measures for revising the economy, citing a World Bank-funded cash transfer programme he hopes could act as an economic stimulus as well as the LRR cuts by the RBM.

But given how depressed the local economy is, these are too little to lift the ailing economy’s spirits.

The only ray of hope for the country maybe five months away during the Mid-Year Budget Review Meeting of Parliament where, I hope, Gondwe could come up with bold measures to save the economy, which should include an expansive stimulus programme targeting massive infrastructure investment and cash transfers.

Where will the money come from? Well, I would not mind widening the deficit on carefully selected public infrastructure investments that have multiplier effects on the economy.

Otherwise, as things stand now, this pain is here for the long haul.

But do President Peter Mutharika and Gondwe have the backbone to push through such an agenda?

History is not very encouraging.