Charles S R Chuka: Financial and economic challenges for Malawi
Address by Mr Charles S R Chuka, Governor of the Reserve Bank of Malawi, at the Bankers
Association Dinner and Dance, Blantyre, 8 September 2012.
* * *
The President, Bankers Association of Malawi, Mr. William Chatsala and your Executive
Committee
Chief Executive and Management of Banks and Other Financial Institutions
The Vice Chancellor, Dr Emmanuel Fabiano
The Principal of Polytechnic, Dr Grant Kululanga
The CEO, Bankers Association of Malawi, Mrs. Nkungula,
Distinguished Guests
Ladies and Gentlemen
I am very delighted to be part of this colourful occasion. And so I want to thank you,
Mr President, for the invitation to partake in the dinner that is soon to be served. It is the
dining and wining part that I came for but I can also well appreciate why you would want me
to say something, albeit short. I therefore intend to be very brief in my remarks.
Mr president, ladies and gentlemen
Let me start by applauding BAM executive management for being foresighted in fostering
discussions and debate on issues that affect the banking industry and thus the entire
economy. It is through occasions like this one that the financial and banking experts in this
country can make enormous contribution to the policy making process. I can assure you that
we - the Reserve Bank of Malawi team - do carefully listen to sentiments expressed in our
consultations as well as the media.
I must admit there are public sentiments that we prefer to ignore. Allow me to give you some
examples. First, on August 14 The Nation carried a story "Banks Borrow K0.8 trillion from
RBM". That was for the month of July, meaning the RBM went away with K1.4 billion in
interest. Obviously, the so called banking liquidity crisis was going to get worse with
borrowing from the Discount Window. Well, the truth of the matter is that the K25.9 billion
daily average was a rolling figure and not to be treated as separate borrowings.
Today it was the turn of Daily Times which carried the title "Scrap off floating exchange
regime", the argument being it makes planning difficult. Well, I hope that IBAM members
made more money when the Kwacha was fixed. My sense is that planning meant nothing
then in the absence of hard currency in the banks. I think that IBAM members stand a
greater chance than hitherto to make more money.
At the same time, however, I want to agree that achieving stability remains the overarching
goal for the Reserve Bank of Malawi. I am referring to stability that will be sustained and not
temporary - so businesses can plan better with much longer time horizons than was possible
before the floatation of the Kwacha.
Mr president, ladies and gentlemen
As a listening organization, there is something we must clarify though. The 49% devaluation
and the subsequent (15%) depreciation of the Kwacha has increased prices but not by
64 per cent. The real effect of currency adjustments comes through the rate of inflation -
that's what measures the average change in prices and thus the loss in purchasing power for
the nation as a whole. This explains the acceleration of inflation from 12.4% in April to 21.7%
in July. By the way, urban inflation rose from 15.5% to 25.1% during the period. We estimate
inflation to be between 21% and 24% by end-year with an average of between 17.5% and
19.8% for the year. Thus, when all companies come to review salaries in January 2013,
adjustments in salaries will not exceed the average inflation unless that particular company
has made huge profits. Adjustments effected during this year will be taken into account
accordingly.
It is therefore quite instructive of the nature of and motivations in our public discourse to hear
the kind of salary increases that some of our esteemed institutions and social advocates are
calling for. I very much hope that the employers will be standing and the workers will still
have their jobs when all the demands are met. Ask the person who has no job how life is like.
If in its wisdom the government succumbs to the demands of our public institutions, the
results are not hard to contemplate. First of all, there is a limit to the ratio of wages and
salaries to the total recurrent budget. Anything beyond that limit is unsustainable and the
government will one day be forced to reduce its establishment. Unless substantial cuts are
made in other budgetary lines to cutter for the unplanned salary adjustments, the 2012/2013
budget will become very difficult to implement, domestic borrowing will increase, and with
that pressure will mount on the Kwacha exchange rate and interest rates. The result will be
higher inflation and continuous loss of purchasing power for wage earners. The country could
enter into a vicious circle which could be even harder to break. Of course few people would
believe that - after all things in Malawi have never become that bad, except to remember
that we remain among the poorest of nations after nearly 50 years of independence.
Mr president, ladies and gentlemen
I very much hope that in our life time we will all manage to build an economy in which all
citizens will have the opportunity to fully participate in the generation of income and
enjoyment of fruits of their labour. Public discourse will be about how to sustain development
and the welfare of all citizens.
We will have dispensed with windy and inconclusive debates on the negative impacts of
devaluations and high interest rates on the man in the street. Labour relations will be more
constructive than destructive - employers and employees will be discussing how to improve
productivity so that their company can beat the competition and all staff can get bonuses.
The economic environment that I am describing is quite possible with a floating exchange
rate, and a government that is totally committed to fiscal prudence. The Kwacha exchange
rate will have - for all practical purposes - adjusted fully to economic fundamentals and
fluctuations will reflect inflation differentials with our major trading partners and the impact of
exogenous shocks.
In such a scenario I believe the level of foreign exchange reserves could exceed six months
of imports. In today's terms, that is almost equivalent to 100% foreign exchange cover for the
total money supply.
Mr president, ladies and gentlemen
Way before that, there will be no need for exchange controls that have hitherto crippled the
ability of the citizens to protect the purchasing power of their savings and thus their ability to
increase investments in productivity capacity. For instance, if you got your pension
commutation on April 30, your plans to build a house or invest in a small business are now a
pipe dream because the 49% devaluation plus the 15% depreciation since then have cut the
purchasing power of your pension by over 60%. Perhaps you should be satisfied with an
investment in a bicycle.
However, for those Malawians that have access to hard currency all the time, their story is
totally different. By holding onto some dollars which they sold after the devaluation, they
have become relatively richer. In others words, for most of us, exchange controls inhibit
active risk management and foster social inequalities.
Instead of being a temporary measure to manage the oil price shock in late 1970's,
exchange controls have become a permanent feature of our economy. We are now scared to
remove them as exogenous shocks - fuel price increase increases, unfavourable terms of
trade, global financial crises and so forth - have never given Malawi a breathing space.
Our neighbours in Zambia were wiser: they abolished exchange controls in the 1980's. At
that time both Malawi kwacha and Zambian kwacha were about 2 to US$1. Today Malawi's
is approaching K300 and Zambia's about K5, 000. Until recently, Zambians were completely
free to choose between holding, quoting or transacting in US dollars. The job of defending
the Zambian Kwacha's role as legal tender fell on the fiscal authorities and not the central
bank or man in the street. Indeed, the Bank of Zambia became more of a central bank as the
conduct of monetary policy became much easier and credible.
Recent changes are raising questions not about the efficacy of removal of exchange controls
but government's resolve to sustain fiscal prudence.
Mr president, ladies and gentlemen
I refer to the Zambia only to underscore the fact that the Kwacha has been floated within a
constrained framework - it is still strongly supported by exchange controls on capital
transactions - that is movements of funds across the border for investment, savings or good
old speculation is prohibited. You are even prohibited from holding onto dollars without
permission. It is currently illegal to quote or make payments in hard currency.
In the circumstances, therefore, there is a limit to which the Kwacha can depreciate. While it
is difficult to estimate that limit, it is definitely the amount of money to purchase hard currency
that matters most. This is where the Reserve Bank of Malawi comes in - to balance the
supply of money to economic activity and in so doing contain inflation and exchange rate
stability. That work is made extremely difficult when the government of the day is forced to
print money. That is why the government has committed itself to zero domestic borrowing in
order to ensure early attainment of macroeconomic stability and thereby help Malawians to
have a chance to improve their lives. Growth and job creation requires a stable environment;
we are not yet there, and please do not rock the boat.
Mr president, ladies and gentlemen
Analysing the on-going labour disputes and to suggest a solution is obviously beyond my
pay-grade. I am, however, comforted in the knowledge that all concerned citizens understand
the risks ahead of us and the need to stabilise the economy, enhance growth and create
jobs.
For that, we also need strong banks, banks that can facility investment. Banks that can afford
to set aside some capital to cover loans or investments in junk bonds. By junk bonds I mean
loans to investors who have minimal resources or just good ideas - very risky borrowers. It is
only strong banks - well capitalised and solvent - that can afford to take on such risks. It is
strong banks that can facilitate access to finance by the SME's that are so critical for
Malawi's growth and job creation - not banks that are likely to lose shareholder value by
lending carelessly.
Ensuring a strong financial system is one of the major roles of the Reserve Bank of Malawi.
In this task, we will be as professional as possible. We will do everything in our power and
capacity to protect the savings of the man on the street whether such savings are placed in
banks, pension funds or insurance and assurance companies. The days for financial
institutions that can't pay up or run away with people's savings have since passed.
Financial institutions should at all times represent a beacon of hope and prudence,
underwriting good business and facilitating maintenance of sound macroeconomic
fundamentals. In other words, financial institutions must champion financial deepening and
access to finance in a sustainable manner. Financial soundness calls for a focus on
longterm profitability and not on short-term profit taking.
Mr president, ladies and gentlemen
I have taken too much of your time and now it's time to wish you an enjoyable evening.
I thank you for your attention and may God bless you.