Consequences of RBM decision on policy rate
The decision on 4th November, 2015 by the Reserve Bank of Malawi’s (RBM) Monetary Policy Committee to raise the policy rate from 25 percent to 27 percent, is a mockery to any private sector-led economic development efforts of this country.
It is a decision justified by the RBM’s misplaced single-minded short-term focus on fighting inflation as a cure to inflationary pressures that face this country from time to time; oblivious to the fact that the sustainable way to fight inflation is to encourage production of goods and services, whose mismatch with their demand, creates the inflationary pressures.
RMB’s actions are taken under the guise of bringing about price stability. Instead of reducing the policy rate to encourage long term borrowing for productive purposes, such as manufacturing, RBM has opted for a wrong choice. This kind of decision-making is what has exterminated any prospects for Malawi to move forward economically. RBM makes decisions that are suitable for developed countries with nearly full employment of its factors of production.
These decisions are not appropriate for Malawi and cannot help this country advance. No wonder we are backtracking instead of moving forward.
In earnest, RBM has played a more negative than positive role in the Malawi economy. Instead of being practical, its policies have generally been textbook oriented and these textbooks are written by Western economists for application in their economies.
One must always modify the learning, taking into consideration the realities of the stage at which Malawi is in its development.
Evidence from newly developed economies are very clear in terms of the role commercial banks played in injecting capital into the real, productive sector, as a result of enabling policies from central banks.
Malawi’s central bank, RBM, is doing exactly the opposite by ensuring that all sectors remain subservient to the financial sector.
No wonder the private sector in general, and the public of course, has always blamed the commercial banks, whether rightly or wrongly, for making hefty profits.
When one considers that commercial banks are guaranteed a gross margin by RBM, now at 27 percent, then it should not come as a surprise for the commercial banks to make such huge profits. Anything else above 27 percent is a bonus. Which other industries, other than monopolies, are guaranteed any kind of gross margin?
Commercial banks benefit from the policy of RBM, which is not necessarily their own creation.
It is, therefore, the policy stance of RBM that is a problem. As a matter of fact, other countries before have deliberately created a negative interest rate environment, where interest rates are lower than inflation, with a view to encouraging banks to divert their resources to productive sectors where returns are positive.
RBM would not even want to hear about such a forward looking policy as all evidence points to the fact that it is not interested in long term development of this country, otherwise Malawi wouldn’t be where it is now.
The Reserve Bank needs to learn from the Global Financial Crisis of 2007 – 08 which was caused by the global financial sector, particularly banks, as a result of developed countries paying too much attention to this sector in place of the real sector.
The countries that escaped this crisis are those whose focus was on the real sector – the sector that produces goods and services, and which matters for long term price stability – such as China.
Focus on inflation fighting using the policy rate as a tool is appropriate for countries with near full employment of factors of production. Malawi is a long way from this status. What applies to developed countries should not just be copied and imposed on developing countries such as Malawi.
Malawi, like other developing countries, needs a more developmental central bank, just as the now developed countries had development oriented central banks that helped them industrialize.
Their central banks then were also linked to the treasury, not decoupled as dictated by the same countries now through the International Monetary Fund (IMF) and the World Bank.
The policies currently being employed by the Reserve Bank are misplaced and cannot take this country anywhere. Malawi needs monetary policy-makers that are practical to the situation, not rigid in their thinking.
The message to the Reserve Bank therefore is that its current monetary policies are killing any efforts to move this economy forward. No monetary policy-maker should take any pride in policies that bear no long term fruits for this country.
Malawi needs a monetary policy environment that encourages long term investment such as manufacturing for the country to take off. The current stance of the Reserve Bank is not helpful to the country.
*The author is the Chief Executive Officer of the Malawi Confederation of Chambers of Commerce and Industry
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