Charles S R Chuka: Looking at Malawi's future
Address by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the
Economics Association of Malawi (ECAMA) business dinner, Blantyre, 20 July 2012.
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The Patron, Economics Association of Malawi, Mr Thom Mpinganjira;
CEO of FDH Financial Holdings;
Acting President of ECAMA, Mr Edward Chilima
Distinguished Guests;
Ladies and Gentlemen;
It gives me enormous pleasure to be amongst you tonight and so I do want to say,
thank you, for inviting me to this annual dinner.
I have been reminded this evening that, by virtue of being Governor of the country's
"dreaded" central bank, I also assumed the position of Chairman of the Board of
Trustees of the Economics Association of Malawi. While I am yet to fully appreciate my
new role in the Association, I am most grateful to whoever came up with the idea of
honouring a Governor with such responsibility. Allow me for a moment only to count my
luck that many of the stones that will be thrown upon me will not come from this highly
cultured group.
In such turbulent waters, it is always worthwhile to take time off to interact and share
hopes and fears with others equally stressed by the unwelcome costs of adjustment to
such an acute macroeconomic misalignment as that Malawi went through in last five
years.
I do not intend to recap what happened since 2004 - well that is a year after I took an
early retirement - a well-deserved one. Suffice to ask a few questions: when fate has
placed upon you responsibility for monetary policy, what do you do if you find
yourself siting on less than one month import cover, money stock is growing
consistently at above 30 percent a year and inflation that used to be in single digits for
a while - thanks to cash transfers to farmers - is accelerating fast.
But hold on, a few clarifications are in order here: first, what I called one month import
cover should be adjusted by the fact that the banking system was holding payments
arrears of about $400 million, and you have no idea what was kept outside that
system. Second, the increase in money stock was being pushed by credit expansion to
both the private sector and government. And this despite the fact that you had a zero
fiscal budget.
Yes, I heard you saying to me, Mr. Governor, get to the point. How do you justify the
excruciating pain being experienced by industry and the man on the street? You
devalued by a whole 49 percent to K250 and the currency has depreciated since then
by another 14 percent to K285. Then from nowhere you increased interest rates by an
ugly 5 percentage points! That's not all, Mr. Governor; you have done nothing when the
banks raised lending rates not by 5 but by 10 percentage points!
Give me a chance to respond albeit briefly. As we are dining here tonight, the IMF
team working on Malawi's request for a new Fund- supported economic recovery
program, and Malawi's Executive Board member in the Fund, are putting together a
strong case that Malawi deserves to be supported in its recovery program. I can
envisage the way the case will be laid out.
Let me try to put the argument before the IMF Board: In sharp contrast to the political
impasse to effectively deal with the country's problems under the Bingu regime, indeed
departing sharply from the country's history of stop-go policies, the new government of
H.E. Mrs. Joyce Banda has undertaken bold measures to correct long- standing
macroeconomic imbalances and to set the stage for an economic recovery in the months
ahead.
The local currency has depreciated by 63 percent in the last two months and interest rates
have been hiked with the Bank Rate jumping from 13% to 23% to tame underlying
inflation pressures and support the Kwacha exchange rate which now floats freely.
Indications are that the pace of reforms will be sustained consistent with the agreed
program in view of the President's demonstrated passion to transform Malawi and
improve the welfare of her people. The President has also taken clear steps to allow the
central bank policy independence which Malawi badly needs. We therefore recommend
approval of Malawi's reform program with a doubling in access to Fund resources.
Well, I believe I can afford to be presumptuous here, if this story line is true, then the
chances are that come Tuesday morning Malawi will wake up to realize that the IMF
program has been approved and if the government can adhere to its stated policy of
zero borrowing, then Malawi's future is on the right path.
You can imagine what some of us feel when we read in the papers and hear on the
radio, and indeed hear in some circles "amenewa ndiye sakutithandiza". Dumbani
Mzale in an article in today's The Nation tried to produce a balanced article by putting
together the comments by World Bank's Country Manager, and those by Ben Kalua, with
a rejoinder from an unnamed economist arguing that "recent monetary policy
developments have triggered a high cost of borrowing by the private sector which could
essentially retard Malawi's gross domestic product (GDP) of 4.3 percent manufactures
.will incur huge cost of production which could force them to pass on to consumers; hence
exerting pressure on the headline inflation rate."
I wish I was in a position to determine how many economists agree with which side
of the story. I will never know of course. But my sense is that even learned
economists and experienced businessmen share the sentiments of the unnamed
economist.
Fortunately, the IMF Board will not say to the staff team, hold on, what we hear in
Malawi is that people are hurting, companies are closing down, the government has
no will or capacity to see through this complex reform program. No, they will not say
that, not because it cannot be said but because we are not a special case. Many
people around the world are going through the same thing. Not because the IMF says
so. But because when you mess up you pay the price. We all messed up. We all
consumed beyond our means, thanks to an over- valued exchange rate. We all
praised the government for single digit inflation and we agreed with the measures being
put in place to generate foreign exchange.
To justify an over-valued currency, we called upon government to force every
exporter to repatriate our hard won foreign exchange - I am yet to fathom how a
country can claim hard currency it has not earned - the government only owns what
it earns through taxes and the hard currency earned through sales of its local currency.
The government does not own anybody's assets, and that's by Constitution.
The short of the story is that we have all become Indigenous Economists - we recall that
we have lived on subsistence farming all our lives, we will make it. Global rules of the
game do not apply to us - we have our own rules. The man on the street is entitled to
undiminished income. He is entitled to zero inflation. If the government has devalued the
currency, it must increase salaries by as much. I am not even sure that the ailing
companies have the resources to fully compensate for the lost purchasing power without
passing on the cost to the same consumer.
We want to live comfortably as before, forget the fact that others are unemployed
because we are busy exporting jobs through an overvalued exchange rate, through
negative interest rates that undermine the savings culture and encourage low
productivity. Forget the many hours spent out of the office in search of fuel that
never came or that finished just before we got there.
Allow me to conclude on the following note. If we had a choice, we would have left
the Kwacha and interest rates alone. However, the extent of economic malaise was
unprecedented in our short history and it will take a lot more work and sacrifice by the
man on the street before things get better. This is not the time for growth. It is the time
for correction. Hopefully by this time next year, so I believe, this country will be
different.
The key to successful recovery will be the patience of the man on the street and the
political will to implement the 2012/2013 Budget as passed. With that the currency
will stabilize; interest rates will begin to come down; foreign exchange reserves will be
built up and investors will start looking at Malawi again.
Inflation should be contained within an average of 18.5 percent in 2012, coming
down slightly to about 16 percent in 2013 but with a much lower rate at year-end.
Growth will pick up as projected at 5.9 percent and payments arrears will be history.
We will forget that fuel used to be scarce. With increased reserves, we will open up trade
more so that Malawians can enjoy the economic freedoms so enshrined in our
Constitution.
That will be the time for the central bank to watch carefully growth prospects and
prevent a runaway inflation - single digit inflation will come but in a sustainable way. I
can foresee increasing investment in both export and import-substitution industries.
That's what a free float supported by appropriate other monetary and fiscal policies
brings about. Obviously, that brings about some instability but not forex shortages. By the
way, with a free float you do not need 3 months import cover every time. But we must
build up reserves even beyond three month because this is a country and we face
many exogenous shocks which require reserves to be addressed expeditiously.
Well, we do not have the luxury of the counter-factual - what would have been the
situation had the government - as two journalists have put it this week - through the
Reserve bank of Malawi, taken the policy actions to-date. We will never know.
As I close, I believe commendations are in order for your continued participation and
contributions towards ECAMA, its mission, as well as for the way you have championed
economics. Now everyone wants to be known as such. You have more work to do
ahead of us. Keep the torch burning.
Oh, yes, perhaps I should remind us that ECAMA's sole existence depends on our
resources, time, and dedication. Your gathering here tonight in such large numbers to
dine and share economic experiences is clear evidence of your willingness to enhance
the economic profession and progress in the country for the benefit of the state and its
citizens. Please do make sure you are a registered member and to pay any dues.
You get from ECAMA what you put in - ideas for strengthening the Association.
With these remarks, it is now my pleasure and privilege to wish you a great dinner and
fruitful discussions, bon appetite.
I thank you for your attention.