INTEREST RATES
MEASURING AGAINST OUR NEIGHBOURS

The Government’s exercise of great prudence in managing public finances precisely domestic debt repayment has positive implications. Now, companies especially those in manufacturing can now concentrate on their core business and move away from trading in treasury bills. It is expected that the capital market will begin to focus on long-term investment.

This is great achievement summarized as; real GDP growth of 8.5% in 2006 (5.7% expected in 2007), improved food security (0.5 Mn ton maize surplus in 2006 and 1.1 Mn ton in 2007), debt cancellation after reaching HIPC completion point, interest rates subsequently from around 30 per cent in May 2004 to 20 per cent in June 2007, single digit inflation rate (May 2007: 7.9%); generally stable exchange rate; and improved credit rating (Fitch’s Rating) from CCC to a B- (March, 2007) is also acknowledged by the Malawi private sector. These indicators summarized by MCCCI and many other commentators surely resound the fact that Malawi is showing right signals to both existing and potential investors.

In this year’s budget statement, the government has clearly spelt out that “its goal is a progressive reduction of interest rates up to a point where interest levels are competitive with those of neighbouring countries”. Indeed the Reserve Bank of Malawi decided to cut the bank rate further from 20 percent to 17.5 – a lovely coincidence with the VAT for ease of memory of business people!

Lower government domestic borrowing has brought down market interest rates. The Reserve Bank of Malawi (RBM) which is responsible for setting monetary policy and supervising the financial system must also be congratulated for their role. At its October 2006 meeting, the monetary policy committee of the RBM decided to cut the bank rate (the rate at which commercial banks borrow from the RBM) to 20 percent from 25 percent.

All indicators then expected the RBM to cut the bank rate again as the reduction in the government’s domestic debt continues reducing the crowding out effect in the credit market. The country’s monetary policy is aimed at achieving low and stable inflation, with authorities targeting a single-digit rate by 2008. The sweet news is that the single-digit rate of 9 percent was reported in March 2007. This development suggests that in the money market, time was ripe for the bank rate to be trimmed. In this year’s budget statement, the government has clearly spelt out that “its goal is a progressive reduction of interest rates up to a point where interest levels are competitive with those of neighbouring countries”. Indeed the Reserve Bank of Malawi decided to cut the bank rate further from 20 percent to 17.5 – a lovely coincidence with the VAT for ease of memory of business people!

While congratulating all economic managers, one need not fall into the trap of being preoccupied with immediate pleasure of achievement. All managers ought not to act on impulse though. Let us not exaggerate our achievements to the extent of losing sight of the future destination, i.e., “interest levels competitive with those of neighbouring countries”. Taking a critical look at the destination, one observes that Malawi still has to dig deep to become competitive relative to the neighbours in as far as attracting investment is concerned.

The chart below clearly shows how Malawi compares with the neighbours.




Surely even the current levels of interest rates are not comparable to the neighbours. Without being controversial, our interest rate is simply uncompetitive and, obviously, makes business uncompetitive especially on the international market. Four of our potential competitors on the export markets have their interest rates below 10 percent and three have around 15 percent. Mozambique and Zambia has achieved particular achievements in terms of the remarkable fall is 2002 and 2003 and sustained their rates below 20 percent.

A simple conclusion could be that Malawian producers would have to still face competition even on the domestic market at least in short to medium term. It must therefore be appreciated, at least without having to place unnecessary pressure on the domestic producers, that our national agenda of becoming a predominantly producing and exporting country may come rather slowly assuming our neighbours maintain their current rates other things equal. However, there is no reason to despair but keep working hard and consistent.

Overall, it is encouraging that the RBM and government are driving the economy in the right direction – the policies are effective.