Wednesday, 19 February 2014

Fall in interest rates

Sunduzwayo Madise

Although the Reserve Bank of Malawi (the central bank) has maintained the 25% base rate, National Bank of Malawi has reduced its lending later from 40% to 36% (still high one might add) and other players in the money market are expected to follow suit. So those who have loans with banks and have had an increase in the repayments should see a [small] decrease in the amounts.

With news that the price of maize has plummeted even before the harvest [season] has started, [from a peak of K9,000 to K5,000 per 50kg bag] the forecast is that the Consumer Price Index (CPI), a measure of inflation, will fall gradually over the on-coming months, especially as surplus in maize pushes prices further down. This is because maize contributes a great deal (%-wise) to the CPI basket and is only balanced by fuel. Therefore watch the stability of the Kwacha and the fuel prices. Malawi's economy being agro-based reacts strongly to the agricultural season. Maize availability just before harvest also shows that the country, as a country, may not have had a maize shortfall after all and the apparent shortfall could have been due to distribution networks bottlenecks or hoarding. In fact it would seem there are pockets in Malawi which always have surplus maize and pockets that always are in deficit. This is an area which the old Agricultural Development and Marketing Corporation  (ADMARC) was good at. It had area markets that collected [bought] surplus food. Then some of the surplus was sent to the district storage. But there was enough left at the local market to cater for times when the food reserves in the homesteads have dwindled. At the district, a reserve was left for the district needs and the rest sent to the regional reserves. From the region the surplus was moved to the national reserves (leading to the birth of the silos). In this way maize could easily be moved and distributed. The problem was not in commercializing ADMARC per se, but not in ensuring that even after commercializing, a distribution network still existed. Therefore some form of regulatory framework in this area was/is needed.

But are the interest low enough to get loan? At 36% they are not. This is because the economy was expected to grow by 5% in 2013 and rebound to 6% in 2014. In terms therefore of an investment environment for business, unless one is in the katapila [usury] or like business (or some specialized high end business or engaged in a niche enterprise), borrowing for business may be suicidal. We need the interest to come to under 20% in the medium term and at least under 10% in the long term to make borrowing beneficial to the entrepreneur. However as we go to the elections, watch out for treasury borrowing and if Dr Mkwezalamba [Minister of Finance] does not hold on to his reigns hard, all these gains may quickly be lost!

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