Strangling Growth: How Overly Restrictive Policies Stifle Malawi’s Agricultural Economy
Key Business Points
- Monetary policy constraints: The Reserve Bank of Malawi’s (RBM) contractionary monetary policy is limiting agricultural output, driving up year-on-year inflation, and affecting the overall economy.
- Interest rate impact: Reducing the policy rate could lead to reduced inflation and growth in the agricultural sector, but requires careful consideration of the types of agricultural value chains targeted to maximize economic benefits.
- Access to affordable credit: High interest rates, currently at 36 percent, are hindering private sector growth, and a reduction to as low as 15 percent, supported by other measures, could stimulate production, exports, and economic growth.
The University of Malawi (Unima) economists’ study, ‘Macroeconomics and finance in emerging market economies: Monetary policy shocks, agricultural growth and food inflation in developing agrarian economies, misled central banks?’, highlights the unintended consequences of the RBM’s monetary policy decisions on the agricultural sector and inflation. The study found that a one percent increase in the policy rate leads to a 0.011 percent decrease in agricultural productivity, ultimately fueling food inflation and overall inflation. This challenges the conventional approach to monetary policy, where raising interest rates is seen as a means to control inflation. Instead, the study suggests that reducing the policy rate could provide gains in both reduced inflation and agricultural sector growth.
The National Planning Commission director general, Fredrick Changaya, agrees with the study’s diagnosis but emphasizes the need for further analysis on the types of agricultural value chains targeted to ensure the economy benefits fully from the sector. He notes that reducing the policy rate assumes that all agriculture is good agriculture, which defeats value chain ranking on productivity and efficiency. Changaya stresses the importance of applying deeper analysis within the agriculture sector to ensure that value chains make a difference.
The study’s findings are particularly relevant in the context of the current ‘Interest rates must fall’ campaign, which advocates for commercial banks to lower lending rates to give the real sector access to affordable credit. Entrepreneur Hastings Bofomo Nyirenda emphasizes that economic transformation is unattainable if interest rates remain high, crowding out the private sector and leading to job cuts and reduced taxes. Nico Capital Limited CEO Misheck Esau also highlights the need for greater access to cheaper credit for production to happen, suggesting that lending rates to productive sectors should be reduced to as low as 15 percent, supported by a basket of other measures and incentives.
As Malawi’s economy continues to grapple with high inflation, currently at 28.7 percent, and a stagnant economic growth, the study’s findings and the opinions of business leaders underscore the need for a fundamental shift in monetary policy to achieve growth. The RBM’s benchmark policy rate has risen from 14 percent to 26 percent over the past four years, largely due to rising inflation. With the private sector struggling to access capital and facing high interest rates, the need for a favourable interest rate regime that facilitates economic growth and development is becoming increasingly pressing. As the Chichewa proverb goes, "Makola a ku Malawi, akulu akulu" (The economy of Malawi, a big challenge), it is essential for policymakers to carefully consider the study’s findings and the opinions of business leaders to create a conducive environment for economic growth and development.
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