MONETARY AND EXCHANGE RATE POLICIES IN MALAWI

1. MONETARY AND EXCHANGE RATE POLICIES IN MALAWI Presented by Charles S.R. Chuka Governor, Reserve Bank of Malawi “Toward More Inclusive Growth” Conference Lilongwe, November 2-3, 2012

2. Outline • Introduction • Evolution of Monetary and Exchange Rate Policies • Recent Monetary and Exchange Rate Policies changes • Policy Challenges • Outlook • Conclusion

3. Key Points • Inflation being driven by food scarcities • Exchange rate instability reflects continuing liquidity overhang • Monetary policy focusing on tightening M2 growth

4. Structure of the Economy Share of trading activities doubled

5. GDP Outturn Agriculture and manufacturing output revised downwards

6. Objectives of Monetary and Exchange Rate Policies • Main objective: Price and Financial Stability • Other objectives: Sustainable balance of payments and economic growth • Exchange Rate policy is aimed at external competitiveness

7. Evolution of Monetary & Exchange Rate Policies

8. Evolution of Monetary & Exchange Rate Policies

9. Monetary and Exchange Rate Policy Framework & Instruments • Reserve Money Programming (NDA + NFA) • Discount Rate • Open Market Operations • Foreign Exchange Operations • Liquidity Reserve Requirements • Moral Suasion/Signalling • Exchange rate regime: Managed Float

10. M2 and Reserve Money M2 managed through reserve money

11. Lending rates and M2 Low real lending rates pushing M2

12. Domestic Credit Developments Domestic credit declining

13. Inflation Driven by Food Prices

14. Inflation Sources Source: National Statistics Office Manage food prices

15. Money Supply & Inflation M2 impact on inflation unclear (Long lag?)

16. Sources of M2 Growth

17. Exchange Rate and Inflation

18. Impact of Fixed Exchange Rate Policies • Loss of foreign exchange reserves • Import backlog accumulated • Fuel scarcity • Downsizing by companies • GDP growth was reducing

19. Recent Policy Reforms • Exchange Rate floated May 2012 • Bank rate was adjusted upwards twice-May and July 2012 • Fuel pricing is now based on Automatic Pricing Mechanism

20. Recent Policy Reforms (cont’d) • RBM sold about US$220 million between May and August 2012 compared to US$37.7 million sold in similar period in 2011 • Tobacco proceeds re-routed through commercial banks • RBM provided liquidity to stressed banks

21. Recent Policy Reforms (cont’d)

22. Recent Policy Reforms (cont’d)

23. Recent Policy Reforms (cont’d)

24. Recent Policy reforms, cont’d Exchange Rates: Commercial and Bureau rates • Commercial Banks and Bureau rates are now converging

25. Recent Policy reforms, cont’d Gross Official Reserves (GOR) Gross Official Reserves started to improve in July 2012

26. Policy Reforms (Cont’d)

27. Challenges • Containing M2 growth at current levels will depend on successful rollover of domestic debt • Monetary policy space is declining • Pressure on exchange rate is likely to persist due to seasonal factors • Limited supply of foreign exchange • M2 growth is slowing down but inflation is rising

28. Lessons • Inflationary pressures remain • GDP growth still positive • Exchange rates aligned

29. Outlook • Foreign exchange shortages are envisaged to persist as seasonally expected • Given the obtaining macroeconomic fundamentals, there is need to tighten further monetary policy or maintain the current tight stance.

30. Conclusion • Given the current macro-scenario, threats of inflation pressures still persist. • The question is to what extent can monetary policy still tighten without severe adverse effects on the economy?

31. Thank You