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National Bank of Malawi Economic Newsletter January 2009 Contents Global Economic Challenges .3 Major Effects on Malawi ..3 New Measures for Malawi Banks ..3 Foreign Exchange Developments .3 Monetary Developments .4 Inflation ..4 Growth Prospects ....5 Selected Leading Economic Indicators 5 Any opinion expressed in this newsletter should be regarded as solely that of individual persons in our economics department and as such, inquiries and comments should be forwarded to that department. The Bank shall not be held liable for the consequences of any actions taken on the basis of this newsletter. Shadreck Malenga Economics Department National Bank of Malawi P.O. Box 945 BLANTYRE. TEL: FAX: Email: Website: (265) 01 820 622 01 820321 [email protected] https://www.natbank.co.mw BankNet on line: www.banknet.co.mw Global Economic Challenges The frequent downward revisions of world economic growth rates by the various authoritative bodies are testimony enough of ho w deep the current world recession is. It also reflects on the uncertainties as to how far deep the recession actually is and where and at what point it is to finally bottom out. It is now conventional wisdom that key to world economic recovery is to restore confidence in the banking sector together with the unclogging of credit markets. So far, attempts to pump enormous amounts of liquidity into the sector to enable credit freely flow again have not yet borne fruit. Major effect on Malawi The unclogging of world credit markets is very urgent and critical for Malawi to enable the traditional buyers of tobacco access credit to facilitate purchases. If the overseas markets remain crunched, we could see the price of the leaf plummeting. The problem could be compounded by the estimated record crop which has been fuelled by last years attractive prices, which averaged USD2.43 per kg. Preliminary crop estimates indicate a record 250m kgs this year compared to last years production of 190m kgs, typically displaying the classic cobweb behavior of output and prices in relation to seasonal commodities. This perhaps calls for a long term strategy to deliberately manage output and stocks to hedge against such a predictable phenomenon. and, New measures for Malawi banks As part of the on-going reforms, perhaps in part fast-forwarded by the current world financial crisis, the Malawi regulatory authorities have reacted positively in an attempt to inject an element of confidence and robustness in the countrys financial markets. The minimum capital requirements for commercial banks has just been raised from K210m (USD1.5m) to K850m (USD6.07m). Banks currently not meeting this threshold have been given 18 months to comply from January 1, 2009. Indeed the outside perception of a meager minimum capital sum of USD1.5m was not complimentary to our banking system and a deterrent for major investors intending to use our financial system. Although this may not be perceived to be enough, it nevertheless is a step in the right direction. In addition, a new supervisory regime has been introduced focusing more on how various risks are managed and how capital adequacy for individual banks can be determined depending on their risk profiles, rather than focusing on traditional output measures. These measures should amongst other things, bring conservatism in lending and in dealing with risky exotic product packages which caused the world financial melt-down in the first place. Customers of banks should therefore not be surprised to see some subtle changes in procedures and processes in the conduct of banking business as these new measures take root. Foreign Exchange Developments Economic Newsletter © National Bank of Malawi (January 2009) All Rights Reserved Since the beginning of the last tobacco season, the market was compelled to surrender all tobacco proceeds to the Reserve Bank. Additional changes introduced this year include the application of the 60/20/20* rule on all other export proceeds. This has considerably weakened the foreign exchange market and slowed down its development. The ability of commercial banks to sell foreign exchange in accordance with market demands has received a set back. As a consequence, the current foreign exchange market regime and the fixed exchange rate regime now resembles that which obtained in the 1980s, with authorities retaining control of the majority of reserves, nearly subjecting the market to official allocations. A fixed rate regime has the potential of bringing back corrupt practices into the market as has been observed in the past. There is temptation for behind the scenes influence as companies attempt to deal directly with Reserve Bank on matters of allocations. We however believe that this is a temporary arrangement to sort out a temporary problem, and that soon authorities will revert to attempts to soldier on with reforms in line with the spirit of IMF articles to which the country subscribes. Ironically, commercial banks make more exchange profit under this controlled environment because of wider margins than a competitive system. Regardless of the bottlenecks that the fixed exchange rate regime is currently causing in the market, authorities have indicated that it would not be politically expedient to change the regime, probably until after the general elections. Having said that however, a small window for devaluation still exists which can benefit many tobacco farmers who also form a significant part of the electorate. *60% retained by the exporter in FCDA, 20% goes to the RBM and 20% to the market We there fore advise importers not to run excessive positions on outstanding import bills to avoid potential losses. A rough guide to the true value of the kwacha rate is about 1 USD = K162.5, representing half way between the official rate of 1 USD = K140 and that which is prevailing at bureaus de changes (as a proxy of the black market) of 1 USD = 185. Monetary Developments Monetary Developments continue to be substantially expansionary, notwithstanding the aggressive mopping up attempts by the Reserve Bank. On an annualized basis, money supply has for sometime now been consistently growing at a rate in excess of 45%. This level of growth continues to exert undue pressure on foreign exchange reserves and inflation. Barring any political consideration, this would imply that the Monetary Policy Committee (MPC) does not have enough headroom to push for any reductions in interest rates as was envisaged by the budget. Interest rates are therefore likely to remain at current levels in the next six months. Inflation Headline Inflation 0 2 4 6 8 10 12 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Month % 2008 2007 Economic Newsletter © National Bank of Malawi (January 2009) All Rights Reserved A relatively good agricultural season, controlled maize pricing, and a fixed exchange rate have kept the official rate of inflation in single digits, although a thriving maize black market has inevitably emerged with prices up to K4,000 per 50 kg bag while the official ADMARC price remains at K2,600. This implies an inflation rate significantly higher than official published figures suggest. Prospects of maintaining a low inflation rate remain good with an expected bumper maize yield and falling world fuel and fertilizer prices. Assuming the current trend continues, the average official rate of inflation for 2009 could average 8.5%, about 2 percentage points higher than budget ambitions. Growth Prospects Real GDP growth is likely to be around 7%, revised downwards from earlier forecasts of 8.5%. The revision is mainly due to the expected so called second round effects of the global recession, some of which have been described elsewhere in this Newsletter. However, the 7% growth rate, mainly on account of uranium production slated to start in the second quarter of the year ,and a vibrant service sector due to general elections related expenditure, is still robust enough to keep the economy on a sustainable growth path for the time being. Selected Leading Economic Indicators INDICATOR UNIT 2006 2007@ 2008@ 2009@ GDP at current market prices MK billion 384.2 461.7 525.6 615 GDP USD bn 2.8 3.2 3.8 4.3 Population million 12.8 13.2 13.6 14.1 GDP per capita MK (' 000) 30 35 38.6 43.6 GDP per capita USD 220.7 249.8 276.1 311.4 Real GDP growth % 7.9 7.4 7.4 7 Inflation ( average ) % 13.9 9.4 9.4 8 Maize production mn metton 2.6 3.1 3.5 3.9 Bank rate % 20 15 15 15 Base lending rate % 22.5 19 19 19 Liquidity Reserve Requirement % 20 15.5 15.5 15.5 Money supply ( M 2 ) % 18.8 26.7 38 30 Import Cover Months 2.9 3.3 3.7 4.1 Foreign debt % GDP 23 20 18 18 Domestic debt % GDP 23.3 12 10 10 Fiscal balance % GDP -0.9 -1.5 -1.8 -1.8 Current account % GDP -31.6 -28.1 -25.2 -22.6 Tobacco ( avera ge price-auct) USD / kg 1.03 1.8 1.9 2 Tobacco auction sales USDmillion 173.9 194.7 195 250 Source: NSO, RBM, NBM, @ = Projections 5 Economic Newsletter © National Bank of Malawi (January 2009) All Rights Reserved
