Date Of Article: 4/1/2003
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Bank rate stays at 40 percent
By: Ayam Maeresa
The Monetary Policy Committee (MPC) of the Reserve Bank of Malawi has said the bank rate — the interest it charges for lending out to commercial banks — will stay put at 40 percent because reigning economic factors do not support any cuts. Minutes of a recent MPC meeting published on Monday also urged the central bank to step up open market operations to mop up excess money in the economy to keep inflation, which has been on a gradual decline in the past couple of months, under constant check. These views coincide with the sentiments of the bank’s acting general manager for economics Wilson Banda, who said last week that cutting interest rates at this moment will have serious repercussions because “the environment was not right”. He said interest rates will not come down unless government starts spending less money than it makes. He said the situation on the ground, where external foreign reserves has declined to less than three months of import cover in the recent months largely due to a US$75 million (about K6.9 billion) freeze in foreign aid, does not allow the central bank to cut the rate. “In the bank, the position is that government should start running a surplus of the budget and that we should see a simultaneous injection of grants to allow us take out the excess kwachas [by selling dollars],” said Banda. The committee said its review of the months of January and February showed that although monetary developments were expansionary, the inflation rate dropped to 10.7 percent in January because of a slowdown in food prices in the previous month. According to the National Statistical Office (NSO), inflation slightly dropped to 10.5 percent in February. The committee said government spending in the period under review rose to K7.9 billion from K7 billion, pushed up by payments for maturing domestic debts, reimbursements to commercial banks and maize imports. It said payments towards external debts and funding towards government agencies also bloated the bill. Gross official reserves were slightly above two months of import cover at 2.3, after declining from 2.7 months in December, said the MPC. The kwacha, trading at K92.5 against the US dollar as of yesterday, fell on account of the decrease in the foreign reserves, the committee said. The committee said the yields on Treasury bills (TBs) and RBM bills, instruments government uses to borrow from the public and withdraw excess funds from the market, were on the increase as the central bank failed to roll-over maturing TBs due to lower subscriptions at the auctions. “Having considered the above, the committee resolved to maintain a tight monetary policy stance and the bank rate at 40.0 percent,” said the MPC. Industrial analysts blame government for borrowing highly from financial system through treasury bills (TBs), a development that has kept the bank rate soaring and shut out the private sector. But other economic analysts argue that this was a lame excuse meant at disguising the inefficiencies of the financial sector.
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