Centre for Research and Consultancy has urged the Reserve Bank of Malawi to embrace new thinking if monetary policy is to be relevant to the country’s long term strategic vision, the Malawi 2063.
Centre for Research and Consultancy Director Milward Tobias said, the new thinking requires a policy shift from demand to supply side management of inflation.
At its first Monetary Policy Committee meeting for 2021, RBM maintained policy rate at 12 percent and Lombard rate (an interest rate which central bank charges commercial banks for short term borrowing) at 20 basis points.
This decision, according to Tobias, reflects the management of inflation using demand side instruments which, he argues, is not coherent with aspirations of the Malawi 2063.
He said while the central bank attributes this to cautious lending by commercial banks, it is obvious that downsizing of production triggered by compliance to Covid prevention guidelines contributed to shrinking demand for credit.
“These sectors have weak backward and forward linkages and do not create jobs corresponding to the size of their share of gross domestic product. Often credit to wholesale and retail sector triggers pressure on exchange rate since they are dominated by imports,” Tobias said.
He observed that the economic implication of dominance of credit to these sectors relative to other sectors is that high interest rate is a barrier to investment in projects that have long gestation period.
“Having Monetary Policy that is oriented towards demand side management of inflation constrains economic growth especially in an economy like ours that has no development bank.
RBM spokesperson Onellie Nkuna was not immediately available for comment.