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| Business |
| RBM won’t cut liquidity reserve |
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by
Ephraim Munthali, 07 October 2004
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09:43:39
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The Reserve Bank of Malawi (RBM) will not cut the Liquidity Reserve Requirement (LRR) until the amount of money in the economy falls in line with inflation goals, Nation Business Review has learnt.
In a Memorandum of Economic and Financial Policies (MEFP) to the International Monetary Fund (IMF) dated September 8, 2004, RBM governor Elias Ngalande and Finance Minister Goodall Gondwe said they have decided to postpone the decision.
“We have decided to delay planned reductions in the commercial bank liquidity reserve requirement because this would add liquidity to the system,” they said.
They noted that since reducing the LRR last year, government borrowing rose sharply, causing a liquidity overhang that must be addressed before slashing the ratio again.
The liquidity reserve requirement is the fraction of a commercial bank’s deposit with the central bank which does not earn interest.
The central bank cut the ratio from 35 percent to 30 percent last year after four years of protracted debates and further slashed the proportion in June this year to 27.5 percent. It planned to lower it to 15 percent and 10 percent in September and December respectively.
In the document, government said it remains committed to a lower reserve percentage as a way of reducing operating costs of the country’s commercial banks and make room for them to reduce lending rates and increase deposit rates.
Government’s monetary policy stance is to bring inflation to around 10 percent by December next year and push it further to a 5-8 percent range in the medium term.
“We recognise that the recent monetary expansion and poor harvest will push inflation to the 18-20 percent range at the end of this year,” said Ngalande and Gondwe.
By the end of the past fiscal year in June, annual money growth reached 36 percent, more than thrice the 10 percent agreed target under the IMF’s Poverty Reduction and Growth Facility (PRGF) programme.
In addition, above budget spending and delays in budget support increased domestic financing of the budget to eight percent of GDP against a three percent repayment agreement under the programme, said an IMF country report covering the first three months of the Staff Monitored Programme (SMP) released last month.
“This development underscores the importance of bringing the government’s deficit under control and strictly limiting its borrowing from the RBM because this amounts to the printing of money,” Gondwe and Ngalande told the IMF.
Stanbic Bank (Malawi) economist Kondwani Mlilima said on Tuesday that a high reserve ratio reduces the balance the commercial banks can lend and invest.
But on the monetary policy point of view, Mlilima said, the decision is good as it will try to balance money growth with production out put.
Apart from leaving the liquidity ratio intact, the RBM will monitor deposits and broad money on a weekly basis and adjust the bank’s operating instrument—Net Domestic Assets (NDA)— if money stocks are not consistent with inflation goals.
The memorandum said the intensified monitoring has become necessary because of the unexplained rise in cash held by the general public that can only be mopped up if it enters the banking system through deposits.
The bank will also use forex sales to help mop-up excess money currently in the economy. Government hopes the measure will ease pressure on interest rates by lowering the amounts of treasury and RBM bills sold for mop-up operations.
The RBM will also maintain a certain level of forex to meet its operating needs and smooth the kwacha exchange rate by providing a buffer when seasonal or temporary imbalances develop between private sector supply and demand for foreign currencies, says the memorandum.
The SMP team report indicated that the central bank would have to raise the bank rate back to 35 percent to counter inflationary pressure.
Annual inflation marginally fell from 11.4 percent to 11.3 percent in July and August.
But the rate rose 0.5 percent after dipping 0.2 percent on a monthly basis in July and August respectively. Government expects the rate to close the year at 20 percent.
Last week, the Standard Bank of South Africa warned that Malawi’s bank rate could rise by 10 to 35 percent if annual inflation shoots as per government forecast.
In a brief analysis of consumer inflation developments in Malawi, the South African banking group said the discount rate could jump to 70 percent by December, fall to 50 percent in six months and rise to 60 percent after 12 months.
But the group was quick to point out that the RBM is likely to hold any move to raise interest rates for now until later in the year and act only when inflation starts picking up.
Extensive use of local borrowing by the government to finance budget deficits, donor aid freeze and additional expenditures for domestic interest payments accelerated money supply growth, said Standard Bank.
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