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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. Outline. Introduction Evolution of Monetary and Exchange Rate Policies
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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
Outline • Introduction • Evolution of Monetary and Exchange Rate Policies • Recent Monetary and Exchange Rate Policies changes • Policy Challenges • Outlook • Conclusion
Key Points • Inflation being driven by food scarcities • Exchange rate instability reflects continuing liquidity overhang • Monetary policy focusing on tightening M2 growth
Structure of the Economy Share of trading activities doubled
GDP Outturn Agriculture and manufacturing output revised downwards
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
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
M2 and Reserve Money M2 managed through reserve money
Lending rates and M2 Low real lending rates pushing M2
Domestic Credit Developments Domestic credit declining
Inflation Sources Source: National Statistics Office Manage food prices
Money Supply & Inflation M2 impact on inflation unclear (Long lag?)
Impact of Fixed Exchange Rate Policies • Loss of foreign exchange reserves • Import backlog accumulated • Fuel scarcity • Downsizing by companies • GDP growth was reducing
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
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
Recent Policy reforms, cont’d Exchange Rates: Commercial and Bureau rates • Commercial Banks and Bureau rates are now converging
Recent Policy reforms, cont’d Gross Official Reserves (GOR) Gross Official Reserves started to improve in July 2012
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
Lessons • Inflationary pressures remain • GDP growth still positive • Exchange rates aligned
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.
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?