Policy hike hits small businesses

Policy hike hits small businesses

Post was last updated: February 10, 2024

 Small and medium enterprises have been left in the cold followin g Reserve Bank of Malawi (RBM)’s decision to raise the policy rate by two percentage points to 26 percent.

Within a period of 10 months from April 2023, RBM has hiked the policy rate, the key driver of interest rates on loans, by 800 basis points, from 18 percent to 26 percent, as the inflation rate now at 34.5 percent continues to rise.

In an interview with Business News on Tuesday, Chamber for Small and Medium Enterprises Association executive secretary James Chiutsi described the move as “very retrogressive for businesses”.

He said: “That’s not good news for businesses. As we have said time and again, the economy is tough.

“This coming on the heels of the devaluation and foreign exchange shortage, is bad news. Sometimes we even wonder whether this is really in the interest of businesses.”

The development will affect such business enterprises

Chiutsi said raising interestrates will increasecos to f production, making it very hard to compete on both the domestic and global market.

“Our colleagues will bring goods on the market at a modest cost. We cannot do the same,” he said.

Speaking separately, South Africa-based Don Consultancy Group chief economist Chifipa Mhango said the hike is a cause of concern for the business environment in Malawi.

This, he said, is despite that the motivation to valid under the current monetary policy framework. hike the policy rate is

Said Mhango: “What is clearly being depicted is that despite the aggressive monetary policy approach by RBM in hiking the policy rate to contain inflation, this is not being achieved, as the inflation rate surges further in the Malawi economy.

“This 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.”

Oh his part, former Monetary Policy Committee (MPC ) member Frederick Changaya observed that with economic players already chocking from the negative impacts of the kwacha devaluation, the worst RBM could have done was to hold the policy rate.

He said: “We can engineer the macro – economic outcomes we want to see in the next few quarters by being innovative.

“ Not using the outdated models which have given you same outcomes for decades and left Malawi in the bottom three economies of the world.”

 However, Malawi Confederation of Chambers of Commerce and Industry president Lekani Katandula described the policy rate hike as a “good decision that feels painful in the

 short-term but very helpful in the long-term”.

“No one looks forward to expensive financing costs but we all benefit from lower inflation, and the current inflation trajectory left the central bank with no choice but to increase the interest rate to help fight inflation.

“We can only hope that the fiscal side will complement this effort through lower deficits and indeed that the weather

 will be good enough for us to improve on our national agricultural production.”

In a statement of the First MPC of 2023, RBM Governor Wilson Banda said the MPC arrived at the decision after observing that inflationary pressure has intensified such that inflation is projected to persist before it starts to decline.

However , the committee resolved to maintain the Lombard rate at 20 basis points above the policy rate and the Liquidity Reserve Requirement ratio at 7.75 percent for domestic currency deposits and 3.75 percent for foreign currency deposits

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