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| Business |
| 'Low spending to cut interest rates' |
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by
Ephraim Munthali, 05 December 2004
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15:06:53
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The Standard Bank Group of South Africa says Malawi’s drastic cuts in public spending in the first quarter of the current fiscal year could hold interest rate hikes and create chances of further slashes by mid next year.
The IMF, which was in the country last month to briefly review the government’s performance against targets agreed under the Staff Monitored Programme (SMP), said it was impressed with the way government held back expenditure.
“Thus, domestic funding operations [borrowing] have been relatively muted, supporting a lower interest rate environment,” said the bank.
In a brief economic report, the SA group said this week it expects Malawi to successfully complete the Fund’s programme, which would result in the release of budget support from various donors.
Malawi expects to receive US$114 million (K12 billion) of grants and loans from donors during the present financial year on condition that she meets targets under the SMP.
“This signals that interest rates should at least remain at current levels and possibly fall further mid next year,” says Stanbic.
While some risks exist for inflation to rise in the short term, the group said this would not eliminate opportunities for further interest rate reductions over the next six to 12 months.
Annual inflation, which took a downward trend over the past few months, nosed up to 12.2 percent in October from 10.9 percent in September on the back of fuel and maize price increases.
In line with the annual agricultural cycle, said the bank, food prices will continue to rise through to the next harvests in March and may worsen due to low yields in the 2004 season.
Maize—Malawi’s staple food—is the main driver of inflation in the country, controlling 58 percent of the consumer price index.
The kwacha’s stability over the past 12 months, supported by increased proceeds from main foreign exchange earner tobacco, pockets of financial assistance from the World Bank and Britain and the expected aid resumption, are expected to support the 10 percent June inflation target.
But the SA group said current export receipts are inadequate to meet foreign currency demands—especially at the present time when farm inputs and food imports are likely to put a strain on reserves.
The low reserves, said the bank, have led monetary authorities to impose an effective ceiling on the kwacha.
“We do not expect this policy [exchange rate ceiling] to be relaxed over the next few months and thus the kwacha should not depreciate much further beyond 110 to the US dollar,” said Stanbic.
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