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The Nut Cracker: The lion in the room

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I was not surprised to read what the Governor of RBM said at the commemoration of the Bank’s 50 years “….the lion in the room is inflation. … Inflation robs the people of the fruits of their hard labour as well as jobs for their children”.

While we agree that the greatest danger to the economy is inflation, I choose to look at the solutions differently from the RBM. I appreciate the fact that sometimes one problem can have several solutions and it is incumbent upon the decisionmakers to choose the best solution.

Of course decisionmaking involves making a choice. Among competing wants, preference has to be put on scale and selection made on the best alternative.

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As I walk down the streets in Malawi and everywhere I am confronted with massive unemployment, a potential time bomb for the stability of this country.

This nation should find ways to create an environment that is conducive to the creation of job opportunities. I do not expect for once that the government is the only actor in the job creation drive; however, it has the ultimate responsibility to facilitate the creation of jobs.

This means that the private sector becomes a critical partner in this objective of dealing with the scourge of unemployment.

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How then can the private sector thrive and create jobs if the policies we put in place like “tight monetary policies” make it almost impossible for the private sector access funds/capital that would enable it to invest in industries that will create jobs, increase exports, pay more taxes and propel this country to diversify from tobacco into agro-processing industries and other types of economic activities?

Interest rates have become very high, making it almost impossible to rely on borrowed capital to to start a business in Malawi. As of today, interest rates stand between 35 and 40 per cent.

It is practically impossible for businesses that borrowed at flexible rates to plan and survive in this environment.

However, for real investment to take place, for investments that are productive to take root in Malawi, the last thing needed are mega high interest rates.

Encouraging entrepreneurial development in such an environment is a futile exercise and a waste of efforts and resources.

How then do we expect to turn this country from an importing economy to an export economy with such levels of interest rates? Without access to long-term loans at an affordable interest rate, the real sector cannot grow. But Malawi is in dire need of a real sector that can grow and lead to the much sought transformation and diversification of the economy.

This macroeconomic environment gives an unfair advantage to foreign investors who are able to borrow in their home countries and invest in Malawi, turning the Malawian investor into a bystander in his own country.

Making it worse is that in addition to these foreign investors benefiting from low interest rates in their own countries, Malawi then bends down more by parading and donating a concoction of incentives to attract these already advantaged foreign investors at the expense of the Malawian investors. This is pure economic suicide in my thoughts.

In the long run, the lack of entrepreneurial activity manifests itself in low tax revenue collection on the basis that most of these foreign inventors will seek all sorts of tax exemptions, create few jobs and repatriate their capital gains. The reduced revenue forces government to borrow on the domestic market, which leads to high cost of government borrowing as reflected in the yield on treasury bills worsening the credit crisis through the crowding out effects on the private sector.

This is not to say foreign investors should not be encouraged but they need to be encouraged to invest in strategic sectors that Malawians cannot.

They should not be encouraged to come and kill the local industrial efforts of Malawians.

The secondary problem of the reduced government revenue forces government to borrow on the domestic market to make up the fiscal deficit which leads to high cost of government borrowing as reflected in the yield on treasury bills worsening the credit crisis through the crowding out effects on the private sector.

If this government is serious about its transformation agenda, the point to start would be access to long-term funding and single digit interest rate to entrepreneurs.

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