By Kingsley Jassi:
Private sector performance continues to slow down due to myriad factors and experts fear the damage might be aggravated by impact of the central bank’s monetary policy stance.
According to commentators, the industry is denied affordable credit, a situation feared to affect long-term investment interventions.
Commercial banks last week adjusted upwards reference rate—the benchmark for other rates such as interest rate—to 25.5 percent in November, published statements for some banks show.
This could lead to a possible rise in interest rates and exert extra pressure on people and institutions borrowing money from financial institutions.
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Prior to the adjustment, there have been slight increases from 25 percent in May to 25.1 percent in June.
Although the central bank has not adjusted policy rate after the recent Monetary Policy Committee meeting, the raising of Liquidity Reserve Requirement will equally deny access to credit from the banking system, financially crippling the private sector.
Economist Lesley Mkandawire said when the central bank increases the reserve ratio requirement it aims to reduce the amount of funds banks have to lend.
He said this mechanism will reduce the supply of money in the economy and control inflation by slowing the economy down.
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“Whether this is a desirable stance depends on what authorities think. I do not believe that at the current status Malawi needs a slowing down of the economy. We might be barking at the wrong tree,” he said.
Another economist Ferdinand Mchacha argues that tightening monetary policy to control inflation may continue to fail to bring the desirable results because the pressure on inflation is emanating from the supply side.
Mchacha suggests that policies have to target release of credit to the private sector to finance production which would eventually improve supply and address the pressure on prices.
“It is a tricky situation but historically we see that raising policy rate has not helped to bring down inflation when the issues are to do with supply and not demand,” said Mchacha.
“There are not enough efforts to reduce government spending. If the government reduced spending, it would slow down on borrowing that means the financial sector would have more credit that would be accessed by the industry. If the industry accessed affordable credit they would increase production and that would address supply issues,” Mchacha suggested.
Malawi’s policy rate crossed the earlier two decade high of 25 percent, hitting 26 percent in February 2024 from 12 percent at the end of 2021 and that has elevated lending rates currently at above 30 percent, one of the highest in Africa.
With Ghana at 29 percent and Egypt at 27.25 percent, Malawi’s policy rate ranks the third highest, according to the available statistics.
This may have aggravated the already existing challenge of access to finance by the business sector.
On weather shocks which have been affecting the country’s agricultural output, Mchacha said it is high time Malawi built resilience to weather shocks which are affecting other economies globally.
“We need to start creating cushions for these weather shocks. They are not only affecting us, they are also affecting other countries but our friends built enough cushions and are resilient,” Mchacha said.
With low production output over the past five years due to dry spells and floods, Malawi’s exports have also been affected, causing forex shortages at the time aid inflows have also reduced.
