Trade deficit unsustainable

Post was last updated: May 6, 2015

The business community and economic commentators have called on the government and the Reserve Bank of Malawi (RBM) to soften up monetary policy and allow a reduction of lending rates in country.

The call comes a week after RBM announced that its monetary policy committee had resolved to maintain the policy interest rate at 25 percent in line with economic factors prevailing in the country.

However, the private sector has called on the central bank to review its position, citing declining inflation and appreciation of the kwacha as factors that should compel RBM to reduce interest rates.

Malawi Confederation of Chambers of Commerce and Industry (MCCCI) president, Newton Kambala, said high interest rates translate into high cost of borrowing for businesses.

He said a policy to reduce interest rates would not only enable the private sector to access finance at affordable rates and increase production but would also help government to lessen borrowing.

“The government would be compelled to reduce domestic borrowing in-order to allow for a reduction in interest rates,” said Kambala.

“High interest rates are sustained by high levels of government borrowing which crowds out the private sector,” said Kambala.

Chancellor College economics professor, Ben Kalua, said the high interest rates are driving away investors, saying the government should find lasting solutions to curb inflation which is one of the contributing factors when calculating interest rates.

Kalua said the government needs to establish ways of wooing investors to help the country improve its economy and attain single digit inflation.

“For the past years, Malawians have been concerned about the gap between lending rates and deposit rates in the banks. The distance is so wide. This means people who save money get so little for their savings and people who borrow money from the banks pay so much to the banks,” observed Kalua.

“The implications are that low income and then other low return sectors of the economy which are very important like agriculture, manufacturing will be adversely affected by those wide spreads because the interest rates which they need to service for their loans are so high,” said Kalua.

He said with interest rates at over 40 percent, one wonders what kind of business one would do in the country to have a good enough return that would service that kind of debt.

Indigenous Businesses Association of Malawi (Ibam) president Mike Mlombwa said the high interest rates continue suffocating small businesses.

“Our plea is that RBM should revisit their decision and reduce the interest rates. Businesses are failing to survive at the moment due to high interest rates,” said Mlombwa.

Mlombwa said if there is no local investment in the country, the economy will be affected in one way or the other.

“If local businesses are failing to pay back bank loans, do you expect them to invest? An economy without investment cannot perform. Even foreign investors cannot be interested to invest in such an economy,” said Mlombwa.

Inflation rate is currently at 18.2 percent from 24.2 percent in December last year.

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