World Bank queries RBM monetary policy
The World Bank has questioned Reserve Bank of Malawi’s (RBM) implementation of monetary policy, observing that the policy appears to be losing its effectiveness.
But RBM spokesperson Mbane Ngwira in an interview on Wednesday expressed surprise at Bretton Woods institution’s observation, wondering why it should expect monetary policy to be effective when the institution and other multilateral donors continue to withhold its budget support to Malawi, which cushions Malawi’s Balance of Payments (BoP) position.
World Bank is among a group of multilateral donors that suspended budget support to Malawi in November 2013 because of plunder of public funds at Capital Hill dubbed Cashgate.
In its biannual publication on Malawi called the Malawi Economic Monitor, World Bank observes that most of the monetary policy measures that the Central Bank has recently employed appear not to be bearing intended fruits.
Reads the publication in part: “In an attempt to arrest the depreciation in the value of the kwacha, government has implemented a number of administrative measures to regulate foreign exchange trading by authorised dealer banks. However, so far, these measures have had only a limited effect.”
Generally, monetary policy is a process by which a central bank of a country, controls the quantity of money in circulation for the purpose of attaining stability and economic growth objectives of an economy.
In Malawi, the main objective of monetary policy is to achieve low and stable prices, which preserves the value of the kwacha and encourages investment needed to achieve sustained economic growth and employment creation.
RBM uses a variety of monetary policy instruments that include the Policy Rate (PR), the Liquidity Reserve Requirement (LRR), Open Market Operations (OMO) and communication.
In June 2015, RBM issued revised guidelines for foreign exchange trading, including new instructions that banks’ opening foreign exchange rates should not exceed plus/minus 0.25 percent of the previous day’s market average closing prices and that intraday market changes should not cumulatively exceed plus/minus 0.5 percent of opening rates.
The guidelines also required that the rates can only change when a transaction to a value of $250 000, or equivalent, has been executed and that the spread between buying and selling exchange rates should not exceed K5 for all trading currencies at any point in time.
However, the measure was revised in September 2015 with the limit on the maximum spread increased to 2.5 percent.
“While the intention of these administrative measures was to curb speculation and to smoothen patterns of foreign exchange transactions, the measures resulted in an increase in the volume of foreign exchange trading through forex bureaus and an increase in activity on the parallel,” said the World Bank.
The global lender said until Malawi addresses the fundamental issues that are driving depreciations in the value of the kwacha, such measures will at best have only a marginal impact, adding that in the meantime, they are likely to encourage further development of parallel foreign exchange trading.
But Mbane brushed aside the assertions, saying there are certain things that could not work in the Malawi context that World Bank expects to work.
He said: “You cannot expect monetary policy to be effective when you have budget support withheld now for three years running. It is also important to note that there are certain tools that we have used and have worked and are working.”
In the latest Monetary Policy Committee (MPC) minutes, RBM Governor Charles Chuka said this year, monetary policy will aim to bring down annual headline inflation to 14.2 percent in June, but argued achieving the target will require a concerted effort.
Malawi is a proud nation. The World Bank and other international organisations have done nothing to contribute to the national development agenda. If anything they have added to the detrimental and confusion matrix. However, on the point of wrong monetary policy, I am completely in agreement with the sentiment! RBM must not defend the indefensible. Let us be specific and mark the RBM monetary policy on its own 3 objectives a) keep low stable prices i.e. low inflation-> Fail at 26% of headline inflation . Other countries headline inflation is 2%. b) preserving of the stability of the Malawi kwacha-> Fail, the kwacha exchange rate has never been stable recently hitting over 1000 to a GBP. c) encourage investment and economic growth-> Fail at 27% bank rate.
Monetary policy is important to encourage investment both internal as well as foreign direct investment, FDI. The tools and instruments used by RBM are generally speaking correct. However, the targets that are wrong. When every Reserve bank in the world has been reducing the bank rate down to 0% in order to stimulate investment and economic growth, RBM increased its bank rate from 25 to 27% apparently “to stimulate economic growth” ??!! These policies have been there way before donor withheld aid. RBM has not set a narrow interest corridor of say 125 basis point to avoid volatility in the market. High inflation is caused by two key factors of too much printed money and too few goods. a) RBM has printed way to much “broad money” in relation to the economic transactions/ output level of Malawi. 21% growth in broad money last quarter directly transmits to 21% inflation rate. Stop printing money Finance minister to rebalance the economy (near zero seigniorage). Where is the sense of mopping up liquidity from the banks through reverse repos and OMO to reduce inflation while through the back door you print money for the Finance ministry put it all back in? b) too few goods in Malawi is caused by high interest policy which means investment borrowing to produce goods is hampered; fuelling high inflation because of shortage in supply. We need cheap money (low interest rates) in Malawi to stimulate investment in irrigation equipment and other farm implements to triple maize production, say. Malawi needs bold decisions and change key personnel at RBM! This absurdity has gone on for far too long and the people are suffering.