MONETARY AND EXCHANGE
RATE POLICIES IN MALAWI
Presented by
Charles S.R. Chuka
Governor, Reserve Bank of Malawi
“Toward More Inclusive Growth” Conference
Lilongwe, November 2-3, 2012
Outline
• Introduction
• Evolution of Monetary and Exchange
Rate Policies
• Recent Monetary and Exchange
Rate Policies changes
• Policy Challenges
• Outlook
• Conclusion
2
Key Points
• Inflation being driven by food scarcities
• Exchange rate instability reflects
continuing liquidity overhang
• Monetary policy focusing on tightening
M2 growth
3
Structure of the Economy
1980 1990
2000 2010
2011
2012
Agriculture, forestry and fishing
32.7
21.6
22.6
27.8
28.3
27.0
Wholesale and retail trade
12.7
8.2
12.1
20.7
20.6
20.6
Manufacturing
10.2
8.8
7.5
10.6
10.3
9.2
Transportation and Communication
6.0
3.8
2.4
3.8
3.8
3.9
Financial/Professional Services
6.0
4.4
4.6
2.1
2.1
2.1
Construction and Building
5.0
2.7
1.3
3.2
3.0
3.5
Electricity, Gas and Water Supply
1.6
1.5
0.8
1.5
1.5
1.5
Mining and Quarrying
0.0
0.0
0.8
2.3
2.1
2.6
Share of trading activities doubled
4
GDP Outturn
Agriculture and manufacturing
output revised downwards
5
Objectives of Monetary and Exchange
Rate Policies
• Main objective:
Price and Financial
Stability
• Other objectives: Sustainable balance
of payments and
economic growth
• Exchange Rate policy is aimed at
external competitiveness
6
Evolution of Monetary & Exchange
Rate Policies
Period
Monetary Policy
Exchange
Rate Lending
Policy
1964-1986
o
(Financial
o
Repression)
o
1987-1993
o
(Financial
Reforms)
o
o
o
Interest
rate
controls
Preferential
lending
to
agricultural
sector
Price control
on
selected
commodities
1987deregulation
of
lending
rates
1988deregulation
of
deposit
rates
1989-Review
of the Banking
Act
1990-abolition
of preferential
lending rates
Fixed
F/work
Exchange Credit
Rate regime
growth
n Rate
5.0
7.8
3.3
19.0
controls
Pegged to a basket Deregulate
of currencies
Real GDP Inflatio
d lending
7
Evolution of Monetary &
Exchange Rate Policies
Period
Monetary Policy
Exchange Rate Policy
Lending
Real
Inflation
F/work
GDP
Rate
growth
o
1994-2007
(financial
liberalization)
o
o
2008-April
2012:
liberalized
financial
Indirect
Monetary Policy
instruments:
Discount
rate,
OMO, LRR
New commercial
banks
entered
the system
o
o
Free float
Deregulated
Partial deregulation of
lending
exchange controls
establishment of foreign
exchange bureau
establishment of FCDA
establishment of foreign
exchange market,
3.2
30.4
Indirect
Monetary Policy
instruments:
Discount
rate,
OMO, LRR
Defacto fixed exchange Rate Deregulated
with administrative controls
lending
over
current
account
transactions
6.0
10.4
Indirect
Free float with liberalized Deregulated
Monetary Policy
current account transactions lending
instruments:
Discount
rate,
OMO, LRR
1.6
20.1
o
o
o
sector)
May
2012-
to o
date;
(liberalized fin.
sector)
8
Monetary and Exchange Rate Policy
Framework & Instruments
• Reserve Money Programming (NDA +
NFA)
–Discount Rate
–Open Market Operations
–Foreign Exchange Operations
–Liquidity Reserve Requirements
–Moral Suasion/Signalling
• Exchange rate regime: Managed Float
9
M2 and Reserve Money
•M2 managed through reserve money
10
Lending rates and M2
Low real lending rates pushing M2
11
Domestic Credit Developments
K'billion
Percent
450
50
400
40
350
30
300
20
250
200
10
150
0
100
-10
50
-20
Domestic Credit
Sep-12
Dec-11
Mar-11
Jun-10
Sep-09
Dec-08
Mar-08
Jun-07
Sep-06
Dec-05
Mar-05
Jun-04
Sep-03
Dec-02
Mar-02
Jun-01
Sep-00
Dec-99
Mar-99
Jun-98
Sep-97
Dec-96
-50
Mar-96
0
-30
Real Lending Rates (right Scale)
Domestic credit declining
12
Mar-90
Dec-90
Sep-91
Jun-92
Mar-93
Dec-93
Sep-94
Jun-95
Mar-96
Dec-96
Sep-97
Jun-98
Mar-99
Dec-99
Sep-00
Jun-01
Mar-02
Dec-02
Sep-03
Jun-04
Mar-05
Dec-05
Sep-06
Jun-07
Mar-08
Dec-08
Sep-09
Jun-10
Mar-11
Dec-11
Sep-12
Inflation Driven by Food Prices
Percent
120.0
100.0
80.0
60.0
40.0
20.0
0.0
Headline Inflation
Food Inflation
13
Inflation Sources
Source: National Statistics Office
Manage food prices
-20.0
Inflation
Sep-12
Dec-11
Mar-11
Jun-10
Sep-09
Dec-08
Mar-08
Jun-07
Sep-06
Dec-05
Mar-05
Jun-04
Sep-03
Dec-02
Mar-02
Jun-01
Sep-00
Dec-99
Mar-99
Jun-98
Sep-97
Dec-96
Mar-96
Jun-95
Sep-94
Money Supply & Inflation
Percent
120.0
100.0
80.0
60.0
40.0
20.0
0.0
M2 Growth
M2 impact on inflation unclear
(Long lag?)
15
Sources of M2 Growth
K' billion
400
M2 decelerating,
Credit to Govt.
decelerating
350
300
250
200
150
100
50
M2
Net Credit to Government
Sep-12
Dec-11
Mar-11
Jun-10
Sep-09
Dec-08
Mar-08
Jun-07
Sep-06
Dec-05
Mar-05
Jun-04
Sep-03
Dec-02
Mar-02
Jun-01
Sep-00
Dec-99
Mar-99
Jun-98
Sep-97
Dec-96
-50
Mar-96
0
Private Sector Credit
16
Exchange Rate and Inflation
17
Impact of Fixed Exchange Rate
Policies
•
•
•
•
•
Loss of foreign exchange reserves
Import backlog accumulated
Fuel scarcity
Downsizing by companies
GDP growth was reducing
18
Recent Policy Reforms
• Exchange Rate floated May 2012
• Bank rate was adjusted upwards
twice-May and July 2012
• Fuel pricing is now based on
Automatic Pricing Mechanism
19
Recent Policy Reforms (cont’d)
• RBM sold about US$220 million between May
and August 2012 compared to US$37.7
million sold in similar period in 2011
• Tobacco proceeds re-routed through
commercial banks
• RBM provided liquidity to stressed banks
20
Recent Policy Reforms (cont’d)
21
Recent Policy Reforms (cont’d)
Percent
Percent
Exchange Rate Depreciation
60
30.0
Annual Inflation (right scale)
50
25.0
40
20.0
30
15.0
20
10.0
10
5.0
0
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
-10
0.0
22
Recent Policy Reforms (cont’d)
23
Recent Policy reforms, cont’d
Exchange Rates: Commercial and
Bureau rates
•Commercial Banks and Bureau rates
are now converging
24
Recent Policy reforms, cont’d
Gross Official Reserves (GOR)
Gross Official Reserves started to
improve in July 2012
25
Policy Reforms (Cont’d)
26
Challenges
• Containing M2 growth at current
levels will depend on successful
rollover of domestic debt
• Monetary policy space is declining
• Pressure on exchange rate is likely to
persist due to seasonal factors
• Limited supply of foreign exchange
• M2 growth is slowing down but
inflation is rising
27
Lessons
• Inflationary pressures remain
• GDP growth still positive
• Exchange rates aligned
28
Outlook
• Foreign exchange shortages are
envisaged to persist as seasonally
expected
• Given the obtaining
macroeconomic fundamentals,
there is need to tighten further
monetary policy or maintain the
current tight stance.
29
Conclusion
• Given the current macro-scenario,
threats of inflation pressures still
persist.
• The question is to what extent can
monetary policy still tighten without
severe adverse effects on the
economy?
30
Thank You
31