RBM and its mwamuna wa jumbo syndrome
The Reserve Bank of Malawi (RBM) is neither independent from Malawi Government nor free from International Monetary Fund (IMF). It is always caught in the middle of the two competing lovers.
Because it panders to both at different times depending on who has brought or promises to bring home more ma jumbo, our central bank never does what it really wants, which sometimes frustrates it into making bad monetary policy choices.
Nothing exposes RBM’s dilemma more than the question of how to control prices (inflation).
IMF always wants the bank to tether its inflation policy interventions to monetarist foundations, which they say must be curbed by making the price of money expensive.
Thus, RBM pursues contractionary monetary policy, as is the case currently.
But that has not happened, yet the RBM has continued to increase the policy rate, which is only managing to make the cost of credit too expensive for both firms and households.
The only argument left now is that if the ban doesn’t follow this path, inflation would be worse than the current 35 percent, so these contractionary tools are preventive and mitigating measures.
What they do not say is how far they will allow interest rates to chase inflation before they realise that industries are being hurt badly as seen by recent numbers in capacity utilisation.
On the other hand, my take is that government generally wants RBM to invest its energies on foreign exchange market conditions as the primary mechanism for controlling the country’s general rise in prices.
Various respected economists such as Ronald Mangani argue that the exchange rate is the most important valuable in predicting prices in Malawi and not necessarily the RBM’s typical monetary policy transmission mechanism.
In fact, Mangani would rather see authorities being more concerned with imported cost-push inflation that is influenced by the exchange rate rather than the demand-pull inflation that is characteristic of our central bank’s package of worries.
Moreover, just this week, the African Development Bank (AfDB) said in its January 24 issue of Africa’s Macroeconomic Performance and Outlook that raising interest rates in African countries such as Malawi may have limited success in containing or reducing prices because most of the countries face supply-side shocks.
AfDB noted that inflation remained elevated in some African countries despite central banks imposing high interest rates.
My colleague Eric Mtemang’ombe, in his Thursday The Nation business story based on the same AfDB report, notes that since April 2022, RBM has raised the policy rate by 1 200 basis points, doubling from 12 percent to 24 percent yet, over the same period, inflation has risen from 15.7 percent to 35 percent.
With the turmoil and uncertainty underpinning the country, RBM may need some level of sage sanity, which can only come with historical context and lessons.
The current monetary policy trajectory is similar to that which ruled between the years 2000 and 2004 when the RBM kept raising what then was referred to as the Bank Rate to the extent that bank lending rates reached as high 52 percent on average during the period.
The result was that scores of companies shut down amid suffocating finance charges.
But after 2004, the same RBM changed direction, becoming more expansionary while anchoring its price strategy on a very prudent managed exchange rate policy. What changed? There was a new politician in the Presidency in the name of Bingu wa Mutharika who stood up to the IMF and told them in the face that he would neither devalue the kwacha nor free-float it because the country did not have the forex reserve base to support such a move he worried would worsen price instabilities.
Kicking out monetarist Elias Ngalande and replacing him with long time banker Victor Mbewe, Bingu re-wrote monetary policy into a U-turn—successively cutting down the bank rate amid double digit inflation rates while investing heavily in agriculture to produce massively for both domestic consumption and exports.
Within a short while, inflation rates started to fall and ended up in single digits for years with interest rates at one of their lowest during a period that was also characterised by high annual growth rates averaging seven percent for at least five years.
When Bingu died and Joyce Banda came, the IMF convinced her to return to contractionary monetary policy postures. To implement that, she appointed ultra-monetarist Charles Chuka, heralding the return of currency devaluations and depreciations, obsessions with money supply and deploying the policy rate tool to run after inflation.
And that is how we conduct monetary policy in this country. But where do these policy flip-flops to please whichever guy who has brought ma jumbo leave RBM?
