RBM study backs inflation targeting
A study by the Reserve Bank of Malawi (RBM) to evaluate the practicability of including the exchange rate as one of the response variables in the monetary policy reaction function has established that the development has more losses than benefits.
The RBM’s monetary policy has since 2018 been guided by a version of an inflation targeting framework, which was developed with the support from the International Monetary Fund (IMF).
Under this framework, the stance of monetary policy is determined by the inflation outlook represented by the inflation forecast.
However, given the prevalence of the effects of foreign shocks continuously hitting Malawi, there have been calls to review the design of the monetary policy and consider the one which incorporates the exchange rate as one of the response variables in the monetary policy reaction function
But the study, done by Kisu Simwaka, Mtendere Chikonda and Takondwa Banda of RBM titled ‘Impact of monetary policy reaction to exchange rate misalignment in the presence of foreign shocks: The case of Malawi’ noted the regime would affect welfare of Malawians.
According to the study, while this regime could be suitable for attainment of exchange rate stability, it will come at the expense of unfavourable performance on the RBM’s price stability mandate, in addition to welfare cost.
Reads the study in part: “The properties of this indicate that the regime with exchange rate stabilisation promotes exchange rate stability.
“However, the stability of the exchange rate is achieved at the expense of exacerbating the instability in all the key policy variables, including output and inflation.”
Commenting on the study, economist Bond Mtembezeka observed that unless the country fixes the macroeconomic environment, any policy would not be efficient enough to achieve the objectives of the monetary policy.
He said: “Fundamentally, the macroeconomic problems Malawi faces are structural in nature.
“The problem with our monetary policy is that some of the variables are adopted variables and not necessarily our own.”
Economic statistician Alick Nyasulu said in an interview that unless the country takes concrete steps on the real side of the economy to deliberately promote exports and reduce costs of trade, it will remain vulnerable to exchange rate shocks.
The RBM has been implementing a tight monetary policy.
