Policy rate adjustment irks local SMEs

Local small and medium enterprises (SMEs) have cautioned that policy slippages from the fiscus will undermine the effectiveness of tight monetary stance adopted by the central bank.

The SMEs raised the concerns at Reserve Bank of Malawi (RBM) head office in Lilongwe yesterday where the central bank held a monetary policy conference to appraise stakeholders on the key assumptions that prompted them to raise the policy rate.

In her presentation, RBM senior economist Takondwa Chauma said the bank expects inflation to remain elevated in the short to medium-term and the monetary supply to grow above the nominal growth as measured by the gross domestic product.

Reacting to the presentation, LM Aquaculture Limited managing director David Nkhwazi cautioned that the monetary policy  including raising the policy rate will not be effective if the government does not address the negative spillovers emanating from the growth in monetary supply, which is in turn driven by the excessive government borrowing.

He further said the growing spread between the formal exchange rate and the black market rate is undermining SMEs’ business operations and rendering them uncompetitive.

Said Nkhwazi: “Exporters sell the proceeds from their businesses using the surrender requirement at a lower rate but pay for freight fees with Iata [International Air Transport Association] at a higher exchange rate. I sell the forex to the bank at around K1 060 but I buy it back at over K1 500 when charged by Iata. We are losing money when exchanging the forex.”

Agreeing with Nkhwazi, Zuwa Energy chief executive officer Jones Ntaukira argued that raising the policy rate has not deterred borrowing; hence, urged the central bank to consider other policy options to tame inflation.

He said: “Investors and entrepreneurs will continue to borrow even if the cost of borrowing goes up. They will borrow and will only push the cost of production to the consumer, which will raise the prices of products and push up inflation.”

“Government borrowing is one of the key drivers of the growth of monetary supply. It is obvious that raising the policy rate does not deter the government from borrowing.”

When asked for comment, the directors at the conference referred us to senior principal economist Mark Lungu. He had not responded to our questionnaire as we went to press at 3:30pm yesterday.

In its July 2023 issue of the Malawi Economic Monitor, the World Bank cautioned that the monetary supply growth arising from excessive borrowing would continue to exert pressure on inflation.

Since April 2021, RBM has raised the policy rate three times from 12 percent to 24 percent, but the government borrowing has continued to go up.

In the past two years since the Tonse Alliance rose to power, the country’s public debt portfolio in nominal terms has grown from K3.67 trillion in 2019 or 65 percent of gross domestic product (GDP) to about K7.9 trillion or 75.7 percent of GDP at the end of 2022.