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Indeed, they may no longer be CEOs

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I read in The Daily Times of Friday August 12, 2016 under the title “Reserve Bank speaks tough on poverty”. The article quotes the deputy reserve bank governor for economic services as the one who spoke tough on poverty at the Farmers Union of Malawi annual meet. My initial reaction was to celebrate that someone is speaking the same language as me. However, after reading the article, I became disillusioned.

I think to specifically point to a few individuals as the main culprits in the analysis is rather simplistic and self-serving. With due respect to my university lecturer (She taught me environmental economics in my other life as a student), I thought the first port of call for the Deputy Governor would be to do an internal analysis and tell us how the policies pursued by the reserve bank itself have helped to ease poverty in Malawi.

It is sometimes easier to point the log in someone else’s eye while ignoring the bigger log in your own eye. This is the case in point. The obsession of the Reserve Bank of Malawi with targeting inflation with contractionary monetary policy and increase in interest rates is one of the things that increase poverty levels in the country. Theory indeed tells us that inflation causes poverty but the Malawi inflation is not a monetary phenomenon.

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The 1989 Reserve Bank of Malawi (RBM) Act made RMB independent from government under Section 4. This independence means that RBM alone and no one else is responsible for monetary policy while the Ministry of Finance is in charge of fiscal policies in Malawi. What this means is that an honest analysis of the poverty issues in Malawi should always include the role of the monetary policies pursued by RBM on poverty. Monetary and exchange rate policies can affect the poor primarily through three channels: inflation, output and the real exchange rate.

It is not a secret that inflation hurts the poor, so the fact that time and time again, RBM almost always misses the inflation targets is a cause of poverty. Of course, RBM always finds someone else to blame for the poor forecasting in inflation targets in Malawi. Failure of RBM and its partners to deal effectively with inflation robs the poor in Malawi. Inflation is a regressive tax for the poor and curbs growth which is a necessary condition for poverty reduction.

The monetary and exchange rate policies that are in the remit of RBM’s mandate affect output fluctuations. There are several ways in which this can happen. For example, RBM obsession with exorbitant interest rates affects output negatively, hence adding to the increase in poverty levels in Malawi. It is also a known fact that failure to stabilise the exchange rate is another cause of poverty. The loss of value of the Malawi kwacha is devastating for an import-dependent economy like Malawi. This loss of value of the kwacha translates into increases in prices of all imported items and any other items that use imported raw materials. This is what is referred to as imported inflation. As stated above, inflation leads to poverty. Perhaps RBM would do us all a favour by focusing on how its own policies and action have stifled businesses in Malawi due to the high cost of capital. The high interest rates have made industries unprofitable to the extent that some have closed down and people have lost their jobs to join the poverty masses overnight.

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It is common sense that interest rate and poverty have significantly positive correlation. So it can be said that rising interest rate leads to greater poverty severity index. Two reasons seem to be behind this. First, most poor people are highly likely to be net debtors. To them, higher interest rate may be a burden, causing them to cut back their spending. Second, other than net debtors, any people in poverty can face worse situation due to substitution effects of interest rate. When interest rate rises, opportunity cost of present consumption increases, reducing current spending and enlarging future consumption. Accordingly, poor people will cut back consumption, causing greater poverty severity.

RBM, according to the Act, should be acting independently, this includes independence in setting the inflation targets. Inflation targeting is typically associated with a flexible exchange rate system which Malawi adopted in 2012. Inflation targeting sets an inflation target for RMB and gives the responsibility for achieving the target to it. Failure to meet this target is squarely the fault of the bank.

The deputy governor is quoted as saying: “There are some people in offices who are delaying or completely failing to implement good policies because they fear that once they do that, they may no longer be CEOs. Let’s not deceive ourselves, we cannot achieve anything if we continue doing that”.

Would this same observation apply to the current office holders at RBM?

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