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| Business |
| Inflation, deficit halt interest cut |
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by
Ephraim Munthali, 28 July 2004
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18:36:12
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Rising inflation and a K14 billion budget deficit in June has forced the Reserve Bank of Malawi (RBM) to revert to a tight monetary policy stance that has left the bank rate stuck at 25 percent.
Apparently, the RBM, which loosened its tight monetary policy in June through a 10 percentage point bank rate cut has seen that inflation would continue rising in the coming months and needs to be controlled.
Governor Elias Ngalande stunned economists when he slashed the bank rate from 35 percent to 25 percent at a time when money supply was growing at 30 percent annually and the deficit was still wide.
A July 8 Monetary Policy Committee (MPC) meeting that Ngalande chaired to review monetary developments in May and June identified three factors that are accelerating inflation.
First is the expansionary money supply which the Committee said was mainly brought by government overexpenditure. The MPC said this factor would exert pressure on domestic prices.
Last month, the government overspent by K14 billion after collecting close to K5 billion and spending close to K19 billion, said MPC.
The Committee said the Bingu wa Mutharika administration filled the June deficit by borrowing from the private sector using treasury bills and getting credit from the central bank through ways and means advances.
When compared to May, government spent about K9 billion more than a K6 billion income, according to the MPC.
“The budget deficit widened further and the annual rate of inflation continued to rise during the period under review,” said the Committee.
Stanbic Bank (Malawi) economist Kondwani Mlilima yesterday wondered how government could have incurred such a deficit.
“If the figure of K14 billion is the budget deficit for June alone, then government owes us [Malawians] an explanation,” said Mlilima.
On the other hand, Mlilima said government could have borrowed the K14 billion to cover fresh borrowing and repay old debts. Domestic debt is estimated at K55 billion.
Finance Minister Goodall Gondwe and secretary to the treasury Patrick Chilambe could not be reached for an explanation yesterday.
MPC said the second factor for the expected inflation rise is recent increases in crude oil prices on the international market which would raise domestic fuel prices and the cost of goods.
And the third reason is the maize production shortfall in the current season which the Committee said would impact negatively on food inflation if government delays to intervene.
Maize production fell 13 percent, according to figures from the National Statistical Office published yesterday.
Maize, the staple food crop accounts for 58 percent of the consumer price index, making it the most influential index in determining inflation.
“Having considered the above development, the Committee resolved to maintain a tight monetary policy stance [and] maintain the bank rate at 25 percent,” said the MPC in its minutes signed by Ngalande.
Mlilima said the Reserve Bank could have decided to tighten its stance again to contain liquidity in order to reduce the rate at which inflation is growing. Annual inflation currently stands at 11.6 percent.
“If interest rates are reduced further and inflation keeps rising, we may end up with negative real interest rates and a negative saving rate makes it difficult to mobilise savings,” he said.
Actually, the Committee admitted that the reduction in the bank rate had led to negative real interest rates on savings deposits in some banks
With the bank rate targeted at 10 percent by December and inflation expected to close the year at 12 percent, negative real interest rates could drive savers to opt for the relatively risk free assets market.
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