Download MINUTES OF THE 49th MEETING OF THE MONETARY POLICY

MINUTES OF THE 49th MEETING OF THE MONETARY POLICY
COMMITTEE (MPC)
1.0
INTRODUCTION
The 49th meeting of the MPC took place on 31st October 2005 at the
Reserve Bank of Malawi in Lilongwe. The purpose of the meeting was
to review monetary developments during September 2005 through midOctober 2005, and to decide on the stance of monetary policy.
Present
Mr. V. Mbewe - Governor (Chairman)
Mrs. Mary C. Nkosi - Deputy Governor
Mr. P. Kabambe - Acting Secretary to the Treasury
Prof. B. Kaluwa - Chancellor College, University of Malawi
In Attendance
Director, Research and Statistics
Director, Internal Finance
Director, Financial Market Operations
Director, International Operations
Executive Assistant in the Governor’s Office and Public Relations Officer
Apologies
Dr. W.T. Banda - General Manager, Economic Services
Mr. P. Kamwendo - Principal Secretary, Economic Planning & Development
Mr T. Sitimawina - Director, Economic Affairs, Ministry of Finance
Deputy General Manager, Economic Services
Deputy General Manager, Operations
Acting Deputy General Manager, Supervision of Financial Institutions
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2.0
REVIEW OF MONETARY AND FINANCIAL DEVELOPMENTS
Overview
2.1
Developments in the monetary sector during the period, September
through mid- October 2005, were mixed. Whereas the major monetary
aggregates met the end September 2005 performance criteria under the
Poverty Reduction Growth Facility (PRGF), the situation deteriorated by
mid- October. Government budgetary operations deteriorated during
September 2005, almost similar to developments of the preceding
month. Annualised inflation rose to 15.8 percent in September from 15.4
percent in August. The Malawi kwacha exchange rate depreciated
slightly by 0.6 percent during September, but started appreciating in
October 2005.
Broad Money
2.3
Broad money balances dropped month-to-month by 1.6 percent to K51.1
billion in September 2005, compared to an increase of 0.5 percent in
August. The contraction was due to both net foreign assets (NFA) and
net domestic assets (NDA) of the banking system, which dropped by 7.0
percent and 0.4 percent, respectively.
2.4
Over the twelve-month period to September 2005, money supply grew
by 17.6 percent compared to a growth of 18.6 percent recorded in
August.
Domestic Credit
2.5
Total net domestic credit extended by the banking system dropped by
K4.0 billion to K38.2 billion in September after another drop of K3.2
billion in August.
2.6
Net credit to government decreased by K4.1 billion to K21.1 billion in
September compared to another drop of K4.0 billion in August 2005.
The decline emanated largely from the monetary authorities as
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government redeemed K6.0 billion of Treasury bills held by the central
bank.
2.7
Gross credit to the private sector went down by K68.0 million to K18.2
billion in September against an increase of K973.6 million in August
2005, following loan repayments by some companies.
2.8
Net credit to the parastatal sector decreased by K129.5 million to
negative K1.1 million largely on account of an increase in their deposits
with commercial banks.
Monetary Authorities Accounts
2.9
During the week ending 21 October 2005 NDA of monetary authorities
dropped by K109.5 million to K16.2 billion, largely on account of other
assets (net), as net credit to government rose during the week.
2.10 NFA of the monetary authorities rose by K529.1 million (US$4.4
million) and amounted to K5.4 billion (US$44.0 million) as of 21
October 2005. Inflows during the week were mainly government project
funds for MASAF of US$7.9 million. Outflows were mainly debt
service (US$1.5 million), drawdown by National Aids Commission
(US$1.3 million) and embassy remittances (US$1.1 million).
2.11 Reserve money rose by K419.6 million and amounted to K21.6 billion,
compared to a decrease of K512.0 million recorded during the preceding
week.
2.12 In terms of the December 2005 PRGF programme targets, while NDA
were K2.5 billion above their K13.7 billion target, NFA were below
their floor by K7.2 billion (US$58.0 million). Reserve money exceeded
its December 2005 projection by K674.7 million.
Inflation Developments
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2.13 Overall annual inflation rose to 15.8 percent in September 2005 from
15.4 percent in August 2005. This was mainly on account of non-food
inflation which accelerated to 16.0 percent in September from 12.1
percent in August. Major increases in the non-food inflation were in the
beverages, housing, household operations and transport categories.
Nevertheless, food inflation slowed down to 15.6 percent from 18.7
percent in August 2005.
2.14 On a month-to-month basis, inflation rose to 5.9 percent in September
2005, from 0.3 percent in August. Food inflation accelerated to 6.8
percent during the month from a decline of 0.1 percent recorded during
the previous month. Non-food inflation increased to 4.9 percent in
September from 0.8 percent in the previous month.
Budgetary Operations
2.15 In September 2005, Government revenues totalled K8.7 billion,
compared to K10.2 billion in the preceding month, of which K4.9 billion
was from Malawi Revenue Authority. In addition, Government raised
K8.9 billion through Treasury bills. Expenditures amounted to K17.5
billion in September 2005 compared to K19.5 billion in August 2005.
Major outlays included K10.1 billion for the maturity of Treasury bills
and local registered stocks, and K5.5 billion for reimbursements to
commercial banks.
Foreign Exchange Market Developments
2.16 Gross official international reserves amounted to US$163.0 million in
September 2005, equivalent to 2.6 months of imports, compared to
US$148.8 million in August 2005. However, as of 28 October 2005,
foreign exchange reserves had dropped to US$123.7 million (1.96
months of imports).
2.17 Inflows amounted to US$25.2 million in September, of which US$16.3
million were purchases from the market and US$7.3 million were
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government project funds. Outflows totalled US$10.7 million, and were
mostly sales to Authorised Dealer Banks (ADBs), foreign mission
payments, and payments for maize imports and amounted to, US$2.1
million, US$2.0 million and US$1.6 million, respectively.
2.18 Foreign currency denominated account (FCDA) balances declined to
US$73.9 million in September compared to US$82.8 million as at end
August reflecting a seasonal development that heralds the lean period.
2.19 The Malawi kwacha slightly depreciated against the US dollar in
September, moving from K123.4109/US$ at the end of August to
K124.1002/US$ at the close of September 2005. The kwacha, however,
appreciated somewhat in October and regained 87 tambala as at 28
October 2005, reflecting an improved supply situation following some
donor inflows during the first two weeks of October.
Domestic Money Market Developments
2.20 In September 2005, liquidity withdrawal from the financial system
amounted to K780.0 million, compared to K2.9 billion in August 2005.
This resulted mainly from sales of Treasury bills from the open market
operations (OMO) portfolio of the central bank amounting to K3.8
billion, and overshadowed all injections through foreign exchange
purchases (K1.5 billion) and net OMO redemptions of K960.0 million.
2.21 In the inter-bank market, daily average excess reserves of the banking
system increased by K449.2 million to K1.1 billion. Consequently, the
volume of daily average inter-bank market activity declined to K352.4
million, about 45.0 percent lower than the preceding month. However,
daily average excess reserves were negative towards the end of
September 2005. This led financial institutions to borrow a total of K3.0
billion from the Reserve Bank’s discount window.
2.22 In September 2005, Treasury bill yields declined following a rise in
subscriptions. The all-type Treasury bill yield decreased by 16 basis
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points to 24.27 percent, while the average all type RBM bill yield
remained constant at 24.11 percent. The average inter-bank rate
registered a monthly increase, from 24.14 percent to 25.27 percent as at
end September 2005.
3.0
RESOLUTIONS
The Committee reviewed the developments above, and resolved to:


Continue with a tight monetary policy stance.
Maintain the Bank Rate at 25.0 percent.
4.0 DATE OF NEXT MEETING
The meeting adjourned at 13.05 hours. The next meeting was scheduled for 29
November 2005.
V. Mbewe
CHAIRMAN
G. P. Kabango
SECRETARY