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Malawi Central bank raises policy rate to 18%: Tough times for borrowers

Reserve Bank of Malawi

LILONGWE-(MaraviPost)-The country’s central bank, Reserve Bank of Malawi (RBM) through Monetary Policy Committee (MPC) has raised the Policy Rate from 14 percent to 18 percent amid economic crisis.

This means citizens tend to borrow money from commercial banks and other financial institutions must brace for tough times ahead.

In press statement on Thursday, October 27, 2022 made available to The Maravi Post, MPC says the bank has kept the Lombard rate at 20 basis points above the Policy rate and the Liquidity Reserve Requirement (LRR) ratio on both domestic and foreign currency denominated deposits.

According to MPC, the decision was deemed necessary to restore price stability, which is essential for reviving and sustaining high economic growth.

“Monetary Policy Committee Raises the Policy Rate to 18.0 Percent The Monetary Policy Committee (MPC), at its meeting held on 25th and 26th October 2022, decided to raise the Policy rate by 400 basis points to 18.0 percent.

“Meanwhile, the Committee decided to maintain the Lombard rate at 20 basis points above the Policy rate and the Liquidity Reserve Requirement (LRR) ratio on both domestic and foreign currency denominated deposits at 3.75 percent,” reads part of the MPC statement.

According to the committee, the global economic outlook remains gloomy, characterised by weak growth and persistently high inflation due to lingering effects of the COVID-19 pandemic and the Russia-Ukraine war.

Below is part of MPC statement:

In the October 2022 World Economic Outlook (WEO), the IMF projects a slowdown in real GDP growth from 6.0 percent in 2021 to 3.2 percent in 2022 and further down to 2.7 percent in 2023. The 2023
growth forecast represents a downward revision from 2.9 percent reported in the July 2022 WEO Update.

Regarding forecasts for the country groupings vis-à-vis the July 2022 projections, the October 2022 WEO has revised downwards the growth for advanced economies by 0.1 percentage points to 2.4 percent in 2022, and 0.3 percentage points to 1.1 percent in 2023.

The emerging and developing economies are projected to register a combined real economic growth of 3.7 percent in both 2022 and 2023, representing an upward revision of 0.1 percentage points for the former, but a reduction of 0.2 percentage points for the latter.

In the Sub-Saharan Africa (SSA) region, real economic growth is projected at 3.6 percent in 2022 and 3.7 percent in 2023, downward revisions of 0.2 percentage points and 0.3 percentage points, respectively.

The weaker growth outlook reflectsthe impact of a slowdown in the trading partners’ growth, tighter financial and monetary conditions as well as negative shifts in terms of trade.

Developments in Global Commodity Prices
International commodity prices for 2022Q3 slightly moderated from the ruling prices of 2022Q2, but remained more elevated than the prevailing prices during the similar period of 2021. For instance, Brent crude oil price dropped to an average of US$99.23 per barrel in 2022Q3, from US$112.74 per barrel in the preceding quarter and compared to an average of US$73.0 per barrel for 2021Q3.

Indications are that Brent crude oil prices could ease to US$85.52 per barrel in 2023, following a backdrop of recession-induced weak demand in some countries.

In the market for fertilisers, the average price of urea declined to US$627.43 per metric tonne in 2022Q3 from US$774.2 per metric tonne in 2022Q2, while that of Di-ammonium Phosphate (DAP) dropped to US$761.8 per metric tonne from US$860.1 per metric tonne during the same period.

The decrease was on account of sluggish demand following the closure of spring planting and fertilizer application seasons in most countries.

However, at the 2022Q3 level, both urea and DAP prices were substantially higher than their respective 2021Q3 prices of US$435.71 per metric tonne and US$620.0 per metric tonne. Generally, the current prices of most fertilizers remain considerably higher than those of 2021 due to sustained supply-chain disruptions which were caused by the COVIDinduced imbalances, and exacerbated by the Russia-Ukraine war.

Domestic Economic Outlook
Domestic real economic activity was estimated to grow by 1.7 percent in 2022,from 4.2 percent in 2021, before picking up to 2.6 percent in 2023.

The slowdown is on account of a number of factors including unfavourable rainfall pattern during the 2021/22 season which affected agricultural production, intermittent electricity power supply, and the impact of the Russia-Ukraine manifesting through high commodity prices.

Meanwhile, the protracted power supply disruptions and fuel shortages, in addition to the prevailing high inflation which is constraining consumer demand, may weigh on the growth prospects.

Developments in Merchandise Trade
Merchandise trade is estimated to have yielded a deficit of US$417.9 million (K434.2 billion) in 2022Q3, from a deficit of US$252.2 million (K216.7 billion) recorded in 2022Q2 and a deficit of US$409.4 million (K337.0 billion) for 2021Q3.

The deteriorating trade balance was explained by a larger growth in imports of US$382.8 million to US$803.2 million (K832.3 billion) than the increase in exports of US$217.1 million to US$385.3 million (K398.1 billion) during 2022Q3.

The rise in exports was driven by tobacco, tea and coffee, and pulses and oil seeds, while the growth in imports was driven by fertilisers as the economy heads into the growing season.

Exchange Rate Developments
Foreign exchange supply-demand imbalances persisted in the domestic market, resulting in further weakening of the kwacha. Specifically, the kwacha US dollar TT exchange rate lost only 0.04 percent (43 tambala) and closed 2022Q3 at MWK1,033.7944 per US dollar.

However, kwacha gains were noted against the rest of Malawi’s major trading partners’ currencies (that is, the British pound, the euro, and the South African rand) during the same period. This followed the US
dollar gains against these currencies owing to recent decisions by the Federal Reserve Board to tighten the stance of monetary policy.

Meanwhile, the Bureaux US dollar cash exchange rate lost 7.69 percent (MWK96.96) during 2022Q3 and
closed the quarter at MWK1,357.8750 per US dollar.

Domestic Inflation Projections
Inflation pressures continue to heighten, as evidenced by the upsurge in the average headline inflation to 25.3 percent in 2022Q3 from 19.4 percent in 2022Q2. Looking ahead, the delayed pass-through of past increases in food and energy prices from global commodity markets to domestic consumer prices could
sustain high inflation for some time.

Consequently, the 2022 annual average inflation is projected to rise to 21.5 percent from the outturn of 9.3 percent registered in 2021. In 2023, headline inflation is projected to rise further to an
average of 21.8 percent.

MPC Raises the Policy Rate to 18.0 Percent
The MPC decided to raise the Policy rate by 400 basis points to 18.0 percent. Further, the Committee maintained the Lombard rate at 20 basis points above the Policy rate and the LRR ratio on both domestic and foreign currency denominated deposits at 3.75 percent.

In taking this decision, the Committee noted that high inflation could frustrate the country’s economic recovery process while also eroding purchasing power of households. In the absence of measures to contain inflation, rising prices will continue to diminish the welfare of households.

The MPC therefore considered expeditious tightening of monetary policy stance as further delays could risk entrenching inflation expectations.

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Lloyd M’bwana
Lloyd M’bwana
I'm a Lilongwe University of Agriculture and Natural Resource (LUANAR)'s Environmental Science graduate (Malawi) and UK's ICM Journalism and Media studies scholar. I have been The Malawi Country Manager and duty editor for the Maravi Post for the past Three Years. My duty editor’s job is to ensure that the news is covered properly, that it is delivered on time, and that it is created to the standards set out in the editorial guidelines of the Maravi Post. I also decide most of what the user will or will not see. And those users will be clicking on the website expecting to see what their trusted news. Organisation has to say on an issue. I started as a senior Reporter with the Maravi Post over a 6 years ago. When I have time, I do field reporting as well.

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