The Reserve Bank of Malawi (RBM) has defended its independence to regulate the financial sector amid concerns that the bank is failing to control government from borrowing from commercial banks and in the process contributing to rising interest rates.
Government’s appetite for domestic borrowing has been cited by economic commentators and Malawi’s development partners as one of the reasons that has contributed to instability in most key macroeconomic indicators.
But RBM governor, Charles Chuka, has dismissed sentiments that political interference is making the central bank fail to carry out its functions arguing that its mandate to control how government is borrowing on the domestic market has a limit.
Recently, business captains questioned RBM’s independence, arguing that an independent central bank would have stepped in to prevent government from borrowing beyond limits that are detrimental to economic development.
But addressing business captains in Lilongwe recently, Chuka said the central bank’s role in blocking government from borrowing on the domestic front has a limit.
“Firstly, it is not technically possible to stop government from borrowing because government cheques are encashed at commercial banks and the Integrated Financial Management System (Ifmis) is not yet linked online to government number one accounts. But work is underway to do so.
“Secondly, following the withdrawal of donor budget support, compounded by the fiscal pressures emanating from weather related shocks, the Reserve Bank took the view that government borrowing was in our national interest while recognising that inflationary pressures would remain elevated for much longer than was anticipated in the economic reform programme,” said Chuka in a statement posted on RBM website.
Chuka admitted that the high interest rates prevailing in the country have contracted the private sector and inhibited investments which this country needs to grow.
“In a way, I am arguing that this squeeze was inevitable given the amount of borrowing government needed in the wake of three major shocks; cashgate and two droughts plus flooding.
“But I have also shown that all is not lost, the indications are that we are now getting closer to breaking the inflation cycle and to begin reducing interest rates. The timing of that reduction will be dependent on developments in food prices, especially if the 2016/17 growing season experiences normal rains.”
Chuka observed that RBM is looking at inflation averaging 16 percent in 2017 if the assumptions hold out.
With inflation running neck to neck with policy rate, Chuka said the central bank has considered the merits and replicability of unconventional monetary policies as practised in the US, Europe, and Japan.
“You will recall how we prevented a major financial crisis in Malawi when we provided liquidity to the banking system in 2014. You may also regard the forbearance accorded to some ailing banks, giving them adequate time to restore capital ratios-as unconventional.
“Given inflationary pressures, the reduction in the Liquidity Reserve Requirement to narrow interest spreads could also qualify as unconventional monetary policy. These measures were not without cost but I think a collapse of the banking system would have contracted economic activity by much more than the high interest rates have done,” said Chuka.
Late last year, the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) faulted the central bank for employing monetary policies which were killing any efforts to move the economy forward.
Reacting to last year’s decision by the central bank to hike the policy rate from 25 to 27 percent, MCCCI Chief Executive Officer, Chancellor Kaferapanjira, observed that no monetary policy-maker should take any pride in policies that bear no long term fruits.
Kaferapanjira said Malawi needs a monetary policy environment that encourages long term investments such as manufacturing.
“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,” Kaferapanjira told us.