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When monetary policy forces farmer into exile

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Sixty nine year-old Marko Makhuwa of Mchepa Village in the area of Traditional Authority Chitukula in Lilongwe, like any other entrepreneur, ventured into farming in 2006 with the hope of earning meaningful income to care of his family and develop himself economically.

He went into tobacco farming with a loan of K650,000 from the Malawi Rural Finance Company (MRFC) which he used to purchase seed, fertilizers and other farm inputs in addition to paying for labour.

But instead of smiling all the way to bank at the end of the farming season, Makhuwa ended up a refugee in Salima where he escaped to and settled for several years with his family after he failed to repay the loan with MRFC.

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“I couldn’t afford to pay back the loan because it doubled within a few months after interest rates were increased. By the end of the season, I had a loan of over K1.3 million to repay yet my total earnings did not go beyond K800,000. I simply could not pay back the loan.”

“In the end, I fled the area and settled in Salima where I did some farming. I only came back after I heard that Malawi Rural Finance [Company] had closed down,” revealed Makhuwa.

“I had to withdraw my eight children from school and my three girls got married. I couldn’t stop them because they did so out of desperation. Along the way, my wife also died and life took a pathetic turn. I am now a shadow of my former self. What pains me most is that I left my formal job to concentrate on farming and a small grocery shop, but that things just didn’t work out as planned,” says Makhuwa.

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MRFC closed down its operations in 2013 after failing to collect K2 billion in loans to hundreds of farmers who failed to cope with soaring interest rates on loans obtained for their farming enterprises.

The consequences were almost similar to what was experienced by fallen farming giant Press Agriculture Limited which also closed down around the same time after lenders pounced on the company for failure to service loans it obtained to grow tobacco, maize, groundnuts or soya beans.

Makhuwa’s experience, MRFC and Press Agriculture’s fate illustrates the implications Malawi’s fiscal and monetary policies have had on farmers, businesses and even consumers.

Malawi’s main monetary policy objective is to achieve low and stable inflation, preserve the value of the Malawi kwacha and encourage investment needed to achieve sustained economic growth and job creation.

However, the Reserve Bank of Malawi’s (RBM) policies have been recently attacked by the World Bank for not bearing fruits.

“So far, these [RBM measures] have had a limited effect,” reads a World Bank biannual publication on Malawi.

Farmer, legislator and chairperson of the Parliamentary Committee on Agriculture, Felix Jumbe, is convinced that monetary policies of the RBM are impoverishing Malawians.

“It is wrong for central bank to continue administering monetary policies that are more lenient to money markets but detrimental to commodity markets,” says Jumbe.

“If Malawians are getting poor, it’s hugely due to RBM policies. We all know that the country’s economy is influenced by activities of commodity markets which are more of products, but it perplexes some of us that the central bank’s monetary policies prioritise money markets at the expense of commodity markets which drive the economy,” said Jumbe.

Following a decision by RBM to raise the official rate of interest to 27 from 15 percent on November 4 last year, Malawi Confederation of Chambers of Commerce and Industry (MCCC) chief executive officer, Chancellor Kaferapanjira, took a swipe at the central bank, describing the move as a mockery to any private sector-led economic development efforts of this country.

“It 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; oblivious to the fact that the sustainable way to fight inflation is to encourage production of goods and services, whose mismatch with their demand, creates the inflationary pressures,” said Kaferapanjira.

He said RBM’s monetary policies are based under the guise of bringing about price stability yet the right way would have been to reduce the policy rate to encourage long term borrowing for productive purposes such as manufacturing.

“This kind of decision-making 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,” he said.

University of Malawi-Chancellor College economics Professor Ben Kalua agrees that RBM’s policies are “pro-cyclical” and worsens instead of correcting situations.

“In Malawi, the inflation rate is very much driven by food prices. Farmers have to borrow to produce more and improve food supply. Unfortunately, the central bank punishes people who are borrowing by raising the policy rate. This, in economics, is called pro-cyclical because it propels an already volatile situation,” observes Kalua.

Economics Association of Malawi (Ecama) president Henry Kachaje, however, needs RBM’s justification for raising interest rates needs to be understood on the basis of prevailing high inflation rate which, he said, would not make economic sense for interest rates to be made administratively lower than the rate of inflation.

He suggests targeted preferential interested rates as the way out of this predicament.

“Let RBM and policy framers offer such discounted interest rates to agriculture commodity producers, especially those producing food items to enable them increase food production which might lead to adequate availability of food and low food inflation,” said Kachaje.

RBM Governor Charles Chuka, in a statement made at the commemoration of RBM’s 50th anniversary celebrations in Lilongwe late last year, pushed the blame of taming inflation and interest rates to the government.

“People must demand of our governments to spend only what we have given [them] in the form of taxes. We must demand low and stable inflation,” said Chuka.

“The task of taming inflation was given to the Reserve Bank of Malawi. But any successes and failures with regard to inflation trends are almost entirely attributed to fiscal prudence or lack of it,” he said.

Chuka said persistent inflation is a monetary phenomenon and that it cannot persist if it’s not financed either by the central bank or central government or both.

The economists may continue to argue over the technicalities of increasing or decreasing lending rates for as long as they can but for farmer Makhuwa at T/A Chitukula’s area in Lilongwe, borrowing is no longer an option for his farming venture.

He has just resigned to subsistence farming which, atleast, enables him to produce just enough for his family’s food requirements.

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