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Is it time to stop the blame game, Sir?

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On Thursday November 10, 2016, The Daily Times had a front-page heading “Chuka blames politicians”. At first, I thought the newspaper got the Reserve Bank of Malawi (RBM) governor wrong. Unfortunately, it is not the first time that the Reserve Bank governor has blamed someone else for the failures of the bank. I know it is easier to push the blame on the politicians; however, on this point I beg to differ with the governor. I will focus on two quotes of interest that the paper attributes to the governor and demonstrate that the governor is being economical with the truth.

The paper reports that the governor said the following words: “The RBM is only responsible for the management of inflation and interest rate but the power to ensure that the two rates are low rests in the hands of the politicians”. Really? Let us examine this statement further. But before doing that, it is important for readers to understand that RBM is formed by an Act of Parliament (Reserve Bank of Malawi Act of 1965).

Perhaps a little history would help here. In 1987, government liberalised the financial sector starting with lending rates, followed by deregulation of deposit rates in 1988. In 1989, the Reserve Bank Act 1965 and the Banking Act 1965 were amended to enact the Reserve Bank Act 1989 and Banking Act 1989. This revision of the Act in April, 1989, effectively made RBM independent from government under Section 4.

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Among the principal objectives of the bank is the following: “to implement measures designed to influence the monetary supply and the availability of credit, interest rates and exchange rates with the view to promoting economic growth, employment, stability in prices and sustainable balance of payment position”.

This means that the full mandate to conduct monetary policy rests with RBM while the fiscal policy issues are the mandate of the Ministry of Finance. So, technically, the governor was lying because by any economic definition inflation and interest rates are monetary phenomena! In fact, the principal objective of RBM is to attain price (inflation) and financial stability. Not the politicians!

For monetary policy purposes, the average inflation rate contained in the government budget is used as a target level of inflation that must be achieved by the end of that fiscal year. The governor and his team then must use the instruments available at their disposal to meet this target. They then cannot and should not blame the politicians for failure to meet the target. In fact, RBM makes this clear in the July 2016 Monetary Policy Statement on page five where it says that “the RBM formulates and implements monetary policy to achieve low and stable inflation.” It is, therefore, not surprising to some of us that on the RBM website one finds the following vision statement “to be an institution of excellence that promotes price and financial stability for economic development.”

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Now let us look at the case of interest rates. In Malawi, the government does not set interest rates; this is the mandate of RBM. It is common knowledge that the bank rate is one of the most significant input in the in determination of interest rates in Malawi. This is done through the Monetary Policy Committee (MPC) of the bank. The MPC is comprised of eight members. This committee is chaired by Mr Chuka himself and the Secretary is the bank’s Director of Research and Statistics. All deputy governors of the bank are members of this committee. The only government representative in this committee is the Secretary to the Treasury. These members meet to deliberate on the global, regional and national economic development periodically and make decision on what monetary instruments apply to address the issues identified. The committee has the mandate to adjust the bank rate, and every time the MPC announces an adjustment of the bank rate, nearly all commercial banks also announce an adjustment usually of the same margin. There is no politician in this committee. Mr Chuka tell us how do the politicians determine the interest rates? If indeed the politicians determine the interest rates, why do we have this committee?

Chuka is right when he argues that inflation in Malawi is both a monetary and supply-driven animal. Some of us have argued for a long time that inflation in Malawi is more of a structural issue; that inflation in Malawi is mostly driven by food costs. However, I disagree with him when he says “it is, therefore, up to the politicians to ensure that the country produces more, in terms of food such as maize, so that we can produce inflation which will in turn directly compel us (RBM) to reduce interest rates”. While this sounds very brilliant, the problem is that the strict adherence to solving inflation through monetary instruments that RBM religiously follows is counterproductive to the wishes of the governor. This is because high interest rates reduce the level of investment and leads to productivity decline that then impact on the output of goods and services including food production. So, instead of ] RBM blaming the politicians for the constraints in production, perhaps he could do the nation a favour by explaining the negative impacts of high interest rates on Malawi’s productive capacity.

I have argued in this column before that the problem with RBM is that they have stopped thinking outside the box. They follow the prescriptions of the IMF and textbooks to the dot as if Malawi is a textbook. Let us all stop blaming others for out shortcomings and start to take responsibility for our actions

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