In 2023, the Reserve Bank of Malawi posted a loss. Journalist TAONGA SABOLA caught up with RBM Deputy Governor for Economics and Regulation Macdonald Mafuta Mwale to understand what led to this.
How did RBM perform in 2023?
If you look at the final audited financial statements of the RBM, for 2023, the bank made an operating profit of K158.09 billion, implying that at operational level, the bank’s generated revenue was much higher than expenditure in 2023, and the bank could have paid a huge dividend to the government, its shareholder. However, the bank made a revaluation loss of about K708.66 billion, leaving a net loss of about K550.57 billion.
You are saying the bank made a revaluation loss of K708.66 billion; in layman’s language, where is this huge loss coming from?
It is very important amalawi azanga to understand that the net loss which is being cited as a source of concern has arisen from a revaluation process of RBM liabilities and assets. The RBM is a custodian of the country’s foreign reserves and this role requires that it makes decisions that are in the national interest. The RBM is a bank to the government, its departments and agencies. In this regard, the RBM is a custodian of the government assets and securities. Some of the assets belonging to these institutions are in the form of foreign currency. Since these assets will be demanded by the owners someday, like any other bank, they are a liability to the RBM. Now, when devaluation occurs, like what happened in November last year, every dollar that the RBM was keeping for these institutions was revalued at the new exchange rate. As a result, instead of paying these institutions K1,136 per dollar as was the case before devaluation, RBM was required to pay K1,700 per the same dollar after devaluation. In total, therefore, the RBM has its foreign liabilities way above its foreign assets, leading to a loss that is referred to in the media.
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But commercial banks were also subjected to things like the devaluation: How come they all made profits?
If you observe very carefully, commercial banks, as profit-driven institutions, do balance their foreign liabilities positions with foreign assets and earn profits from this balancing act, a situation that is impossible for a central bank in a low forex earning country, where Demand exceeds supply. In other words, banks maintain square positions. That is they make sure that at all times foreign liabilities are less than assets. As such, the devaluation has a positive impact on their profits. In short, commercial banks do not have huge foreign loans which the RBM has on behalf of the nation. In very simplistic terms, think of this loss as a loss that RBM bears on behalf of the whole economy when a country is not generating enough forex or assets.
Could these revaluation losses not be avoided?
Even the RBM Act, and indeed all central banks around the world, do realise that these revaluation gains or losses are outside their control and that is why if exchange rate appreciates, the gains go to a reserve account, and if it depreciates, losses wipe out the reserve account as they have done in 2023, and they have to be covered by the shareholder, which is government. In short, the realignment of kwacha when foreign liabilities are more than foreign assets has always led to a revaluation loss. This is normal, maybe it is the magnitude that varies. In 2022, after the Kwacha realignment of May 2022, the RBM made a revaluation loss, which it has been able to repay in 2023 with its recorded operational profit. And just like in 2022, the RBM is committed to repay this revaluation loss in the next financial year or so.
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The public reacted to the revaluation loss. Did you see this coming?
Such a reaction was expected because central banking is a complex task and may not be fully appreciated by everyone. However, it becomes a major concern to the RBM when some quarters of the general public, in particular, perceptibly learned economic commentators; build on the existing knowledge gap to misinform the general public. The RBM acknowledges the concern fully because the Reserve Bank is a public institution of repute, run by accountable public servants, for and on behalf of the people of Malawi.
Moving forward, what must we do as a country?
It is very important that as a country we must address the Balance of Payment imbalance, as we are importing more than what we are exporting, thereby putting pressure on the kwacha. This is our country’s main problem that requires concerted efforts from all of us to generate the foreign assets. That is why there are so many Government initiatives to generate foreign exchange, including the mega farms, labour exports and carbon credit markets. All of these are for the participation of everyone as they are aimed at closing the persistent Balance of Payment Imbalances. As a country, we cannot continue borrowing for consumption or borrowing to support the value of the Kwacha, as this creates artificial stability and is part of the problem we are paying for now. We need to generate foreign exchange for our consumption. I am pleased to inform the general public that, though we are not completely out of pressure, we should be proud as a country that we are on course to achieve this as evidenced by the stabilisation of fuel supply into the country using our own generated resources.
Finally, is the central bank in safe hands?
No doubt. It is in very safe hands, even safer than ever before. With a solid RBM Act, improved procedures and robust safeguards as well as highly qualified personnel and a very critical general public that keeps them on their highest alert. Your RBM is in safe hands ever.
