Coming from a background of high interest rates in 2014, many borrowers were praying that the year 2015 would bring something different in as far as the cost of borrowing is concerned.
This was so because the decision by Monetary Policy Committee of the Reserve Bank to hike the policy rate in November 2014 had left many borrowers gasping for air.
Many analysts, including borrowers, had anticipated that the appreciation of the kwacha in December 2014 would help pull down inflation, therefore force authorities to consider pulling down the policy rate.
The January 2015 floods
Hopeful as the situation was, one big and negative thing happened to the economy.
Malawi in early January was hit by heavy rains, which swept away many maize fields, especially in the Southern and Central regions.
The development was inflation triggering as it exerted pressure on the little food that was there come harvest time in April. This fuelled high inflation, instead of dampening it, as food is the biggest contributor to the Consumer
High domestic borrowing As time went by without budget support from donors, pressure continued to mount on authorities as they hunted for alternative ways to source the much-needed resources to meet budgetary needs.
As donors continued to cling to budgetary purses, Finance Minister Goodall Gondwe and his technical team in Treasury found themselves in a tight corner and resorted to high levels of domestic borrowing in an attempt to save the situation.
The development exerted more pressure on interest rates on the market.
Too many property repossessions
High inflation in the first quarter of 2015 could not provide a fertile ground for authorities to pull down the policy rate.
This resulted in many borrowers defaulting on their on their loan obligations. Months later, newspapers started getting full with commercial banks advertising for houses they had repossessed from borrowers who had failed to pay back the money.
Rough calculations indicate that in the month of March only, properties worth over K16 billion were advertised for sale by commercial banks.
After about 6 months of high interest rates and massive property repossessions by commercial banks one hand and runaway inflation on the other, the Reserve Bank of Malawi (RBM) Monetary Policy Committee thought of a way of bringing down interest rates without necessarily slashing the policy rate.
The MPC in late July decided to reduce the liquidity reserve requirement by 800 basis points from 15.5 percent to 7.5 percent, effective August 1, 2015.
The decision to reduce the amount of cash that banks must hold as reserves by 52 percent, added more liquidity to the world’s poorest economy, thereby giving commercial banks more money to lend out. The slice in the LRR resulted in commercial banks softening their base lending rates to an average of 33 percent from 38 percent.
Pressure mounts, policy rate hiked
In the months that followed, inflation accelerated and came neck to neck with the policy rate. This, in October, left the monetary authorities with little to no option but to effect a 200 basis point hike in the policy rate from 25 percent to 27 percent.
The development spelt bad news for the borrowers who had only enjoyed softer rates for just less than three months.
MPC Chairman Charles Chuka justified decision to hike the cost of borrowing, saying the economy is passing through tough times that need sacrifices.
“The expression of displeasure from other quotas is obvious as we have had high interest rates for more than three years now.
“I am impressed that we still have a good number of operators still doing business because you can only do business in an advent of high interest rates when you have enough capital,” said Chuka.
Banks not happy
With interest rates remaining high, most Malawians expected the lenders, in this case, commercial banks, to be a happy lot as they would realise more earnings from outstanding loans.
But to the surprise of many, a number of top banking executives, including the Bankers Association of Malawi voiced out their displeasure towards the interest rate hike as they knew the development would fuel delinquency and dampen lending.
The move by the MPC to hike the policy rate by 8 percent was received by anger and outrage from the business community who described it as a mockery to any private sector-led economic development efforts of the country.
But MCCCI Chief Executive Officer Chancellor Kaferapanjira said the hike is a decision justified by the RBM’s misplaced single-minded short-term focus on fighting inflation as a cure to inflationary pressures that face this country from time to time.
He said the sustainable way to fight inflation is to encourage production of goods and services, whose mismatch with their demand, creates the inflationary pressures.
The industry chief said the current monetary policies by the RBM are killing any efforts to move this economy forward.
According to Kaferapanjira, no monetary policy-maker should take any pride in policies that bear no long term fruits for this country.
He said Malawi needs a monetary policy environment that encourages long term investment such as manufacturing for the country to take off.
Kaferapanjira said instead of reducing the policy rate to encourage long term borrowing for productive purposes, such as manufacturing, RBM has opted for a wrong choice.
“This kind of decisionmaking 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,” he said.
Access to finance tops business hurdles No wonder the high cost of borrowing came out as a top hurdle of doing business in 2015. According to the Malawi Business Climate Survey (MBCA) conducted by MCCCI, access to finance came out on top ahead of unreliable power supply and high telecommunication costs.
According to the chamber, tight lending conditions, with lending rates in excess of 35 percent affected the cost of finance for businesses.
The industry mouthpiece noted in the report that increased investment and production is a sustainable way of overcoming inflationary pressures, which are a function of production levels.
It noted that establishment of development finance institutions remains key. Currently, Capital Hill is still in the process of setting up a development bank.
So when one summarises 2015, one could not be wrong to conclude that high interest rates threw spanners into the wheels of development for Malawi.