By Benadetta Chiwanda Mia:
As the Monetary Policy Committee (MPC) of Reserve Bank of Malawi (RBM) prepares for its meeting scheduled for November 6 and 7 2024, economic experts are voicing their perspectives on the challenges facing Malawi’s monetary policy.
Amid adopting a tight monetary policy, inflation pressure has persisted.
During its previous meeting, the MPC maintained the policy rate at 26 percent while adjusting the Liquidity Reserve Ratio (LRR) for domestic currency deposits upward by 100 basis points to 8.75 percent.
Economic expert Mavin Banda highlights the precarious position RBM finds itself in, describing it as an “inflation fight that seemingly cannot be won by them”.
Banda notes that food inflation is the most troubling component affecting the Consumer Price Index (CPI)”.
“Maize, which accounts for 90 percent of the food component and 53 percent of the overall CPI, is a major driver of inflation in Malawi. Shocks to maize supply and demand significantly impact the CPI,” Banda says
However he points out that RBM has no control over maize production or procurement to manage these price differentials.
The impact of the policy rate on components within food inflation has drawn attention from monetary authorities.
He noted that RBM is focusing on components like fuel and fertiliser prices, which are heavily influenced by the exchange rate and depleting forex reserves.
Despite maintaining a seemingly stable currency since November 2023, Banda warns that economic leverage through forex and fuel sectors signals potential future problems for consumers.
“With high inflation, reducing the policy rate is out of the question. RBM found that after the second MPC meeting, tweaking the policy rate didn’t lead to automatic price adjustments due to the Calvo pricing principle,” he says.
Banda criticises fiscal dominance, saying it has led to financial repression and uncontrolled borrowing.
“Negative real interest rates are eroding depositor capital and benefiting borrowers like the government and banks,” he adds.
The resultant macroeconomic crises have made private sector borrowing more difficult and costly.
Banda therefore argues that the policy rate is not the most effective tool for Malawi’s monetary policy, suggesting instead that “the Liquidity Reserve Ratio (LRR) is the most consequential tool available”.
He notes that “raising the LRR had a significant impact on banking sector growth in broad money, which finally decelerated in the second quarter of 2024”.
Echoing the concerns, Lucius Pawa, Senior Economist at the Economics Association of Malawi (Ecama), highlights structural issues limiting the effectiveness of monetary policy in Malawi.
“Monetary policies have helped, but are hampered by structural challenges such as low production and reliance on rain-fed agriculture,” Power says.
Power anticipates the next MPC meeting will focus on price stability, a key RBM objective, especially in light of geopolitical tensions affecting oil prices.
“Public debt, at 81 percent of GDP, mostly domestic, means further borrowing could exacerbate money supply growth,” he observes.
With inflation at a steep 33.9 percent as of August 2024, far above the 5 percent target, households are feeling the pressure rising living costs.
“A household of six in Lilongwe saw expenses jump from K420, 000 in April 2023 to K580, 000 by April 2024,” Pawa notes, illustrating the impact on purchasing power.
Given these challenges, Pawa calls for enhancing production and fiscal prudence as key policies for Malawi.
“By reducing external vulnerabilities and improving resilience, Malawi can better weather both global and domestic economic challenges,” Pawa said.
Financial Market Dealers Association of Malawi President Leslie Fatch emphasises the influence of the policy rate on the reference rate, primarily through the Lombard rate
“The MPC’s decisions have a significant impact on the reference rate, depending on their assessment of inflation. Whether they see inflation as transitory, which might not require an increase in rates, necessitating further tightening, will guide their actions,” Fatch explains.
He further notes, “Traditionally, the fourth and first quarters are viewed as transitory periods for inflation. However, this year, the drought has severely impacted food availability and prices, especially maize, which the MPC must consider in their upcoming meeting.”
So, as the upcoming MPC meeting approaches, all eyes are on RBM’s next moves to balance fiscal management with its mandate to control inflation amidst a complex economic landscape.
