Malawi Economist wants bank rate delinked from inflation

Economic experts, monetary and fiscal authorities are expected to meet in Mangochi to discuss the country’s monetary and exchange rate policy direction, according to the Reserve Bank of Malawi (RBM).

The conference on July 25 comes against the background of uncertainty on whether the new Democratic Progressive Party (DPP)-led government will pursue the reforms initiated by the People’s Party (PP) administration such as the liberalisation of the exchange rate regime and the automatic pricing mechanism (APM) on fuel and electricity, among others.

The Malawi Government in May 2012 introduced a number of policy reforms such as reversion to a floating exchange rate regime followed by a tight monetary policy, including the revision of the bank rate in May, July and December 2012 to rein in inflation.

Fuel revision was also changed to be based on APM under which pump prices would be adjusted to reflect exchange rate movement and pricing on the international market.

RBM spokesperson Mbane Ngwira, in an interview on Tuesday, said he would release more details of the conference by end of the week, but information posted on the central bank’s website confirms the conference will take place on July 25 at Sunbird Nkopola in Mangochi.

University of Malawi’s Chancellor College professor of economics Ben Kaluwa, in reaction to the conference called for the delinking of the bank rate and inflation rate.

He noted that in Malawi, the use of the bank rate—the rate at which commercial banks borrow from the central bank and now stands at 25 percent—to rein in inflation is not effective and hurts farmers because the economy is agro-based.

“Inflation in Malawi, is seasonal and is based on food availability. The use of the bank rate to control inflation is not relevant in Malawi and only ends up increasing interest rates which is bad for farmers.

“To control inflation, the country should take a production approach to increase food output. Government should introduce agriculture and industrial development banks. Farmers and the industry will access cheaper loans from these banks and consequently increase production,” suggested Kaluwa.

Indigenous Business Association of Malawi (Ibam) president Mike Mlombwa, in an interview on Tuesday, complained of high interest rates that the country has experienced since the monetary and foreign exchange regime changed in 2012.

“Authorities should be aware that the high interest rates are hurting local businesses. We urge them to find a way of solving this problem, including fiscal and monetary prudence,” he said.

During a monetary and foreign exchange rate policy conference in November 2012 in Lilongwe titled ‘Towards more inclusive growth RBM Governor Charles Chuka, in his presentation said fixed exchange rate policies have impacts, including loss of foreign exchange reserves, accumulation of import backlog and fuel scarcity.

He noted that there are challenges to the new policy, including declining monetary policy space and persistence of pressure on the kwacha exchange rate due to seasonal factors.

The policy change resulted in inflation peaking at 37.9 percent in February 2013 amid a tight monetary policy stance.