The promise to diversify Malawi’s revenue source and reduce the nation’s dependence on tobacco income is a song that has been repeated several times to the extent that the more people hear it, the more irritating it becomes. One would actually think that those in power say these things just like one sings a song that one has heard for so long but does not bother to decipher the meaning of the words in it. Perhaps it is simply a convenient denial of the reality that competitive production output cannot be sustained in any sector if critical monetary indices challenge the creation of vibrant economic activities and job-creation opportunities.
For example, an inflation rate beyond five percent would be unacceptable in most economies that are classified as economically successful and yet Malawi’s inflation which stood at over 23 percent in July is accepted as normal. In fact, the Reserve Bank of Malawi (RBM) in its Monetary Policy Statement number three in January 2016 had the following statement on page six: “The inflation target for the fiscal year Ending-June 2016, as stated in the Budget Statement by the Minister of Finance, has been set at 14.2 percent.”
But by the end of June 2016 inflation was 22.6 percent. This is despite RBM consistently applying the so-called orthodox measures to deal with inflation.
For those that care to listen and read, it has become common practice for RMB to set targets that they rarely meet. One then wonders why the bank has a whole Deputy Governor on economic services and a Research and Statistics Department. Could this be a sign that perhaps the leadership at the bank does not believe in evidence -(research) based policy making and therefore ignores the research results from their own economists. Another reason could simply be that there is no research taking place in their Research Department that is informing policy decisions.
If this had happened once, I would have been of the opinion that this was perhaps a result of some an explained variable in the inflation model. However, it seems to be a habit that these targets are set and then missed by wide margins and life goes on at RBM. In fact, is has been the case of blame someone for the results of my actions and not me. Every time the targets set by RBM are missed, the Governor is quick to blame slippages in the fiscal policy implementation. In 2015, we were told by RBM that inflation will be 15 percent by June that year; come June 2015, inflation stood at 21.3 and the bank in its usual blame-someone-b u t -me – s y n d r ome claimed that inflation target was missed due to poorly informed market decisions by economic agents, especially about the effects of the floods and drought experienced in some parts of the country.
Inflation does not only lower consumer demand; it also reduces the propensity to save which in turn negatively affect industrial capacity utilisation and restrain fresh investment decisions. Surely, diversification will invariably remain a mirage if inflation further spirals out of control and ultimately reduces the value of Malawi kwacha. Inflation does also make government fiscal plans useless, meaningless and unimplementable and poverty will continue to deepen in many parts of the country.
In addition, the combined effect of inflation with the cost of borrowing in Malawi which is 35-40 percent is a sure way not to diversify the country’s economy. How on earth do those in authority expect Malawian products to successfully compete against imports from countries where lower single digit interest rates and supportive infrastructure make export prices more attractive? Is it not total madness that we continue to sign the song of diversification despite the grip of the twin economic devils of inflation and interest rates on the country? How does RBM expect Malawian exporters and manufacturers to compete with foreign entities? The fact that Malawi is becoming a haven for foreign traders (not investors) could be due to the simple economic reason that foreign loans, over which we have no control, are usually cheaper than the rates on domestic loans, over which our monetary authorities have absolute control.
Indeed, the RBM Act unequivocally grants the statutory autonomy to effectively manage money supply and sustain a low and stable general price level (inflation) to the central bank. Unfortunately, while there are electoral consequences of a government that fails to implement proper fiscal programmes, there are no statutory sanctions if RBM fails to deliver on this mandate.