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The minibus economic lesson

This week, while travelling between Lilongwe Old Town and Area 25 in a minibus, The Nutcracker could not help but marvel at the level of analysis of current affairs that takes place in these late night public transport vehicles.

Their level of economic understanding is very real and not based on some mathematical models or econometric gymnastics. Most of people in the minibus were owners of small businesses whose main complaint was the lack of affordable capital to invest in their businesses. These are the people who most of us living in the ivory towers of decision-making should be spending time with. These are the people who will tell the leaders of the political parties the truth and not the members of their national executive committees whose main preoccupation is to be in good books with party presidents. Not the many policy-makers who have mortgaged their intellectual ability to politically motivated promotions.

Why do these hard-working Malawians decry high cost of borrowing? It is because there is a limit to which you can grow a business with personal savings. Sustained business expansion requires additional capital from somewhere, apart from personal savings. This was the lesson from Ms X (did not ask her name) who sells tomatoes. She eloquently taught me and others in the minibus. She was convinced that it is less risky to borrow, if loanable funds come with cheaper rates below 10 percent. The level of business acumen in some of the passengers was probably better than some folks running our parastatals. She continued lecturing the rest of us on how easier access to cheap funds generally stimulates businesses to create more job opportunities. How material inputs from business that have benefitted from low interest loans will also reduce production costs and sustain consumer demand with affordable prices.

Malawi’s cost of borrowing is high. By December 2016, the minimum lending rate was 33.6 percent and the maximum lending rate was 42.9 percent. At this rate, investors will naturally shy away from the risky gamble of providing their own infrastructure and paying K33.60 interest on every K100 borrowed. Malawi’s investment climate is very difficult and thus the productive capacity is shrinking. No wonder, the most successful businesses are those owned by foreigners. These foreigners borrow in their countries at lower rates of interest and, therefore, imported products financed with much lower cost continue to flood our markets. It was not surprising then, in that minibus, when some person claimed at the top of his voice that the most profitable business in Malawi is corruption. Profitable? Maybe, however, the Cashgate has contributed to the volatility in aid inflows into Malawi from a peak of 12 percent of GDP in 2012 to only six percent of GDP in 2015.

The Nutcracker puts the blame for the higher interest rates squarely on the government and the Reserve Bank of Malawi. You may be wondering how does the RBM enforce such rates. The RBM has statutory responsibility to ensure that prices of goods and services as well as cost of funds remain within levels that would successfully drive the economy. This is the RBM that proudly claims that its mission is “to ensure price and financial stability through the formulation and implementation of sound monetary and macro-prudential policies that are consistent with agreed national strategies”.

Yes! This is a bank whose vision is “to be an institution of excellence that promotes price and financial stability for economic development”.

If you believe that Malawi’s prices and financial indicators have attained stability, then you must be living in another country. You must take a ride in a minibus one day and listen to real people with real experiences of impact of the economic policies the country is pursuing.

It has not escaped the notice of ordinary Malawians that the economic growth in Malawi is highly volatile. Malawi is still an economy reliant on aid and rain-fed agriculture; a country which has had to revise its annual budget downwards in the face of dwindling donor support; a country that needs domestic resources more than ever .

One wonders how the country will generate domestic resources if the manufacturing industry and business in general cannot thrive.

The largest contributor to domestic resources in Malawi is tax. The taxes come from income tax of those employed and corporate tax on the profits of businesses. Has it occurred to the policy-makers that the inability of industries to thrive due to high interest rates is counter-productive?

If there is no increase in business activity, it negatively affects the employment rates in the country and reduces the potential amount of income tax the government can earn and similarly the corporate tax that could be a big step towards domestic revenue generation and less reliance on donors. It is time for policy makers to take a ride in a minibus and benefit from the wisdom of ordinary Malawians. Only then, perhaps, will they make decisions that will change this economy from relying on a very narrow export base that experiences high output volatility due to weather-related factors and other external shocks.

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