Monetary policy under scrutiny
National Planning Commission (NPC) director general Thomas Chataghalala Munthali says there is need to implement discriminatory borrowing rates for government to create room for the private sector borrowing.
The recommendation comes amid concerns that the tight monetary policy imposed by the Reserve Bank of Malawi (RBM) has failed to bring down inflation rate to the desired five percent mark. Instead, it is crowding out private sector investment, according to the July 2024 issue of the Malawi Economic Monitor produced by the World Bank.
In an interview, Munthali said while creating a policy that requires the government to borrow at a higher rate would not deter the government from borrowing, it would create room for the private sector to borrow on more favourable terms and spur investment in productive sectors.
The NPC head, whose organisation is the key implementer of the Malawi 2063 and its 10-year implementation plans, believes that tight monetary policies will not complement the country’s development prospects if they are not properly calibrated to complement private sector investment.
He said: “Raising interest rates works when the country has exhausted its factors of production. When the country has not exhausted its factors of production like Malawi, you need to invest to get to fully use those factors of production.
“But the private sector cannot borrow for investment because interest rates have gone up.”
The policy rate,the rate at which commercial banks borrow from the central bank, remains elevated at 26 percent, rising 1 400 basis points from 12 percent in 2020 while inflation remains at around 33.6 percent, significantly above the desired 5 percent mark.
World Bank data shows that private sector credit in Malawi is hovering at around 20 percent, far below the 46 percent average for lower-income countries as of 2021.
As of today, consumer and commercial loans range between 30 percent and 39 percent, which restricts investment and undermines the country’s capacity to leverage the private sector as a driver of economic transformation.
On her part, Economics Association of Malawi (Ecama) acting president Bertha Bangara-Chikadza calls for a more holistic approach to managing inflation that accounts for pressures from the supply-side and exchange rate, which, she argued, limit the effectiveness of the exchange rate.
“Malawi is exposed to imported inflation because the country largely depends on imports. We import fuel, fertiliser, food and pharmaceuticals. This leads to imported inflation when the local currency depreciates or devalues,” she says.
Meanwhile, Reserve Bank of Malawi (RBM) data shows that money supply growth slowed in June 2024 from 47.4 percent to 42.6 percent following the tightening of monetary policy by RBM in May.
According to the June 2024 RBM Monthly Economic Review, the decision by the Monetary Policy Committee to hike the liquidity reserve requirement on domestic deposits by 100 basis points from 7.75 percent to 8.75 percent has led to an immediate withdrawal of about K32 billion from the commercial banks.
Consequently, the annual growth rate of broad money decelerated to 42.6 percent from 47.4 percent in May 2024, but remained higher than the 36 percent registered in June 2023.
In an interview, RBM spokesperson Mark Lungu described the development as positive to the economy, observing that “excessive money supply is not desirable” as it leads to inflationary pressure.
“Ideally, money supply growth should be in line with nominal gross domestic product and it is our expectation that we will get there,” he said.
