Absorbing Malawi’s Extra Liquidity and Economic Diversity
Feb 16,2007 by Rhodrick Junaid
Recent statistical reports on
The Banking Act (1989) and the Reserve Bank of Malawi Act (1989) sanction that all depository institutions operating in Malawi, namely commercial banks, building societies and discount houses, are to maintain minimum cash balances in relation to the preceding week's total local currency deposit liabilities, including government deposits.
As a monetary economic policy instrument, the LRR acts as a regulatory toll to manage liquidity in the economy concurrently protect depositors’ money in the various banks and discount houses.
The supervisory purpose of LLR is to ensure that deposit-taking institutions have liquid funds to repay depositors if necessary. The instrument also restrains the ability of deposit-taking institutions to create credit, hence facilitates the credit flow between the various sectors of the economy.
Consequently, LRR affects very important macroeconomic factors such as interest rates, inflation and the value of the Malawi Kwacha. However, one drawback of this instrument is that funds maintained on deposit with the Central Bank for the purpose of meeting the LRR may or may not earn interest, regardless of whether the amount so carried exceed the requirement.
Effective February 1, 2007, RBM cut the LRR by 4.5 basis points from 20 percent to 15.5 percent. This is very good news indeed for an economy that is predicted to grow at 6% and experiencing a relatively stable currency.
The cut in LRR is expected to result in a rise in deposit rates coupled with a fall in lending interest rates. Ceteris paribus, this should generate new pressure for a further appreciation of the Malawi Kwacha and even lead to stock index rise on the Malawi Stock Exchange (MSE) as traders are buoyed by the good macroeconomic performance.
Eventually, the extra liquidity will prompt banks to increase and speed up lending to the private sector, which in turn will spur investment and lead to economic growth over and above the predicted rates.
In order to sustain ample fluidity, it is imperative that the RBM continue to weaken or relax liquidity control throughout 2007 by employing other monetary tools, especially through open market operations.
The government, private investor and economic policy makers must harness
The time is right for
The time is ripe for
Of course there is the daunting question of whether there is idle capacity in the economy to absorb the extra liquidity. With credit flowing to the private sector, there is a high chance that Private Equity Firms and Venture Capitalists can emerge to absorb the extra liquidity.
These firms will be responsible for providing the much-needed funds to finance business deals in transactions such as mergers and acquisitions, start-up firms and reviving the dwindling Small and Medium Enterprises (SME).With such major economic activity, the apparent economic growth will be sustained and poverty alleviation will be a dream too easy to realise.