Firm calls for economic policy debate as interest rates rise

Analysts are calling for inclusive and robust economic policy debate that could lead to a suitable, tailor-made Malawi’s monetary policy direction.

The calls follow the frequent hikes of policy rate which the Reserve Bank of Malawi (RBM) has been affecting to tame inflation pressure.

Last week, the Monetary Policy Committee (MPC) raised the rate by 200 basis points from 24 percent to 26 percent after observing relentless inflation pressure –now at over 34 percent.

In a statement, Don Consultancy Group Chief Economist Chifipa Mhango said the fact that inflation keeps rising despite authorities tightening stance, tells that the policy tool is not suiting Malawi’s realities.

Mhango has since stressed the need for authorities to adopt a policy direction that does not target inflation.

“Malawi Government should encourage a robust economic policy debate as the RBM Policy Lending Rates may soon surpass the highest levels in the recent history of Malawi.

“The question should be whether such a policy is effective for the structure composition and patterns of the Malawi economy especially on how the Forex market environment is managed through Malawi Kwacha devaluation and also how the Fiscal environment is managed with excessive Government borrowing,” reads part of the statement.

According to Mhango, the failure of the tightening stance to contain inflation rate raises questions around whether such an inflation targeting policy is effective in the Malawi economy where Government is the largest borrower and in a Forex market which is managed through devaluation to suppress demand.

Meanwhile, economist and chairperson of the National Working Group on Trade Policy Fredrick Changaya described the decision as frustrating considering that Malawi’s inflation is not driven by demand.

“Malawi is currently using monetary policy of 1989 which needs to be modernized to suite the country’s economic dynamics.

“We need to understand that Malawians are poor people who cannot demand much –and this leaves our inflation targeting monetary policy irrelevant hence there is need for authorities to open up for debate.

“Now raising interest rates at a time production levels are already low is suicidal,” Changaya said.

The MPC justified the policy rate hike in its statement which also said the Lombard rate was maintained at 20 basis points above the Policy rate and the Liquidity Reserve Requirement ratio at 7.75 for domestic currency deposits and 3.75 percent for foreign deposits.

“In arriving at this decision, the MPC observed that inflationary pressures have intensified, such that inflation is projected to persist before it starts to decline.

“The decision is, therefore, intended to counter inflationary pressures and restore price stability,” reads part of the statement.

Malawi is currently the fourth highest in Africa when it comes to Policy Lending Rates of Central Banks, to which Zimbabwe, Ghana and Sudan are the top three in that order.