Download MINUTES OF THE 58th MEETING OF THE MONETARY POLICY

MINUTES OF THE 58th MEETING OF THE MONETARY POLICY
COMMITTEE (MPC)
1.0
INTRODUCTION
The 58th meeting of the MPC took place on 4th September, 2006 at the
Reserve Bank of Malawi (RBM) in Lilongwe. The purpose of the meeting
was to review monetary and financial developments during July 2006 and
part of August 2006, to decide on the stance of monetary policy.
Present
Mr. V. Mbewe
Mrs Mary C. Nkosi
Dr. W.T. Banda
Dr. P. Ligoya
Dr. W. Masanjala
Governor (Chairman)
Deputy Governor
General Manager
Director of Economic Affairs, Ministry of Finance
Head of Economics Department, Chancellor College,
University of Malawi
In Attendance
Executive Director, Treasury
Executive Director, Supervision of Financial Institutions
Executive Director, Corporate Services
Director, Research and Statistics
Director, Banking and Payment Systems
Director, Exchange Control and Debt Management
Manager, Treasury
Principal Economist, Research and Statistics
Apologies
Mr. R. Mwadiwa, Secretary to the Treasury
Mr. P. Kamwendo, Principal Secretary, Ministry of Economic Planning and
Development
2.0
REVIEW
OF
MONETARY
AND
FINANCIAL
DEVELOPMENTS DURING THE MONTH OF JULY AND
PART OF AUGUST, 2006
Overview
2.1
Developments in monetary aggregates showed that money supply
decreased by K765.1 million during the month of July 2006
compared to an increase of K2.6 billion recorded in the preceding
month. This represented an annual growth of 14.5 percent in July
from 15.2 percent in June. The slow down was due to a decline in net
foreign assets. Net domestic assets, on the other hand, increased by
K3.9 billion to K48.5 billion, compared to a decline of K1.7 billion
registered in June, 2006. Gross official reserves stood at US$100.7
million (1.6 months of imports) in July after having declined by 22.8
percent. Despite the decline in reserves, the Malawi kwacha
appreciated against some major currencies. The annualised headline
inflation decelerated to 14.9 percent in July from 15.3 percent in June
2006. The slow down was attributed to declines in both food and nonfood inflation rates.
Broad Money
2.2
Money supply amounted to K57.6 billion from K58.3 billion
recorded during the preceding month. The slow down in money
supply emanated from a decrease in net foreign assets, in particular
those of monetary authorities on account of increased demand for
foreign exchange.
2.3
On annual basis, growth in money supply decelerated to 14.5 percent
from 15.2 percent recorded during the preceding month.
Domestic Credit
2.4
Total net domestic credit extended by the banking system rose by
K6.0 billion against a decline of K2.4 billion in June 2006. Growth in
credit was more pronounced in the government sector whilst net
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credit to statutory bodies and gross credit to the private sector rose
moderately.
2.5
Net credit to government increased by K5.0 billion against a decline
of K5.4 billion recorded during the preceding month. This outturn
emanated mainly from net credit by the monetary authorities as credit
extended by commercial banks dropped during the month under
review. The central bank’s net claims on government rose by K5.7
billion to K12.2 billion on monthly basis on account of a depletion of
government deposits.
2.6
Gross credit to the private sector during the month of July 2006 rose
by K774.7 million to K21.9 billion following another increase of
K2.4 billion in June 2006.
Inflation Developments
2.7
The annualised headline inflation decelerated to 14.9 percent in July
from 15.3 percent in June 2006. The slow down was attributed to
declines in both food and non-food inflation rates. Food inflation
dropped to 17.2 percent from 17.5 percent a month ago, on account of
improved food supply situation relative to last year. Likewise, nonfood inflation went down to 12.6 percent from 12.8 percent in June,
reflecting declines in prices for beverages and tobacco, household
operations and transport components.
Government Operations
2.8
In July 2006, government operations registered a cash flow shortfall
of K5.2 billion. This was due to increased expenditures against a
slowdown in revenue collections.
2.9
Total revenues amounted to K12.4 billion, a decline from K14.0
billion collected in June 2006. In contrast, total expenditures
increased to K17.5 billion from K16.1 billion recorded in June 2006.
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Developments in Foreign Exchange
2.10 Gross official reserves stood at US$100.7 million (1.6 months of
imports) in July after having declined by 22.8 percent on the levels in
the preceding month. For the economy as a whole, foreign reserves
stood at US$186.7 million (2.96 months of imports) compared to
US$210.9 million (3.35 months of imports) as at end-June 2006.
2.11 In the foreign exchange market, the Malawi kwacha continued to
appreciate against the US dollar, from MK138.9862/US$ as at endJune to MK138.3175/US$ and MK138.2780/ US$ at end-July and 18
August 2006, respectively. The appreciation of the Malawi kwacha
was due to expectations from HIPC debt relief coupled with
improved supply of foreign exchange from tobacco proceeds.
2.12 Foreign currency denominated accounts declined marginally and
closed at US$84.2 million in July from US$84.7 million in June, only
to rebound to US$88.1 million as at week ending 18th August 2006,
reflecting seasonal trends as the tobacco marketing season draws to
an end.
Money Market Developments
2.13 In July 2006, a total of K3.9 billion was injected into the financial
system compared to a withdrawal of K6.3 billion in June. Open
market operations (OMO) injected K7.5 billion whilst foreign
exchange and government operations withdrew K3.3 billion and
K300.0 million, respectively.
2.14 In line with expansionary operations in July, reserve money increased
by 21.1 percent to K25.3 billion. This followed an increase of 120.6
percent and 1.7 percent in banker’s deposits and currency in
circulation to K7.5 billion and K17.8 billion, respectively.
HIPC Completion Point
2.15 On 30th and 31st August, 2006, the IMF and World Bank announced
the completion of the second review of Malawi’s economic
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performance under the IMF supported three-year Poverty Reduction
Growth Facility (PRGF) arrangement and approval of Malawi’s
request for Debt relief at the HIPC Initiative Completion Point and
also under the Multilateral Debt Relief Initiative (MDRI).
2.16 Having reached the Completion Point, a total of US$646.0 million
will be delivered under the enhanced HIPC Initiative. In terms of
MDRI debt cancellation, debt will reduce from US$2.9 billion (170.0
percent of GDP) to less than US$450.0 million (20.0 percent of
GDP).
Government Securities
2.17 During the month of July 2006, total subscription of Treasury bills
dropped by over half to K5.3 billion. This was on account of the
composition of maturities which contained a huge amount of OMO
Treasury bills. Maturities for July stood at K8.6 billion which
composed of K4.0 billion of OMO portfolio and K4.6 billion in
holdings of Treasury bills outside the RBM portfolio.
2.18 Overall yield for Treasury bills gained 11 basis points to 19.7 percent
at end-July 2006 attributed to the 91-day and 182-day tenors which
gained 10 and 31 basis points to 19.09 percent and 19.67 percent as at
end-July 2006, respectively. The 273-day tenor lost 7 basis points and
closed July at 20.35 percent.
3.0
RESOLUTIONS
3.1
The Committee considered the developments in the economy through
mid-August, 2006 and resolved to:



Continue with a tight monetary policy stance.
Maintain the bank rate at 25.0 percent
Maintain the LRR at 20.0 percent.
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4.0
DATE OF NEXT MEETING
4.1
The meeting closed at 12.05 hours. The date for the next meeting will
be in October 2006.
Victor Mbewe
CHAIRMAN
Efford Goneka
SECRETARY