Download minutes of the sixteenth meeting of the monetary policy committee

MINUTES OF THE SIXTEENTH MEETING OF THE MONETARY
POLICY COMMITTEE (MPC) HELD ON 13 NOVEMBER 2001, AT THE
RESERVE BANK OF MALAWI, LILONGWE.
Present:
Dr E.E. Ngalande – Governor and Chairman
Dr Bingu Wa Mutharika – Deputy Governor
Mr. C.S.R. Chuka – General Manager, Economic Services
Mr. E.J. Kambalame – General Manager, Operations
Dr H. L. Ng’ombe – Principal Secretary, NEC
In attendance:
Deputy General Manager, Blantyre Branch
Director, Internal Finance
Director, Financial Market Operations
Director, International Operations
Apologies
Mr. P.E. Chilambe – Secretary to the Treasury
Dr. M.M. Mkwezalamba – Principal Secretary, Economic Affairs
Director, Bank Supervision
Director, Research and Statistics
INTRODUCTION
1.0 The meeting was called to order at 9.10 hours.
OPENING REMARKS
2.0 The Chairperson welcomed the members present and intimated that
the discussion should include any issues that had so far arisen from the
deliberations with the IMF-World Bank team that was still in the country
at that time. In addition, the Chairperson would share the views of the
RBM Board members regarding the MPC.
Adoption of the Agenda
3.0 The agenda of the meeting was adopted.
Confirmation of Previous Minutes
4.0 Minutes of the previous meeting were adopted with some
amendments.
Matters Arising
5.0 Minute 8.0 (15th meeting) - Differences in Exchange Rates
Between those Displayed and What is used in the Actual
Transactions.
The Director, International Operations reported that the differences only
take place when banks receive funds from offshore to their customers
and make conversions. At that point, the customer would discover that
the rate applied was different from the one that ruled on the day the
transaction took place.
The observation by the Committee was, however, that the differences in
the rates charged applied to all customers and not as claimed by the
banks.
The Committee then agreed in general terms that in all unstable
markets, the differences would still occur.
PROCEEDINGS OF THE MEETING
Domestic Money Market Developments
6.0 The Committee noted that reserve money dropped from K8,537.3
million in September to K8,349.5 million in October. This mainly
resulted from intensive open market operations that were aimed at
sterilizing injections from maturing bills, that had amounted to K4,255.4
million.
7.0 A total of K4,798.3 million was withdrawn through a combination of
RBM bills (K2,628.5 million), Treasury bills (489.8 million) and foreign
exchange sales (K1,680.0 million). On net basis, these operations
withdrew some K268.9 million from the economy.
8.0 At that level, reserve money was, however, in excess of the December
Program target of K7,542.0 million by K807.5 million. The operational
target of K7,784.0 million was also missed by K565.5 million.
9.0 The all-type Treasury bill (TB) and the RBM bill yields moved closer
to the Bank Rate in response to the intensive open market operations.
The TB all-type yield registered a significant increase of 6.43 percentage
points from 38.98 percent in September to 45.41 percent. The all-type
RBM yield closed the month at 46.48 percent, marginally up by 1.82
percentage points from the rate recorded in September.
10.1 Regarding money market developments, excess reserves increased
markedly in October due to substantial maturities. These reserves rose
from K183.6 million in September to K278.8 million in October.
Consequently the inter-bank borrowing and discount window operations
dropped during the month under review.
11.0 Preliminary estimates for November were for an increase in reserve
money to K12,685.5 million. This assumed no further open market
operations, no further foreign exchange interventions and deterioration
in Government budget. To contain the situation, monetary policy would
remain tight and government borrowing from the RBM would have to be
drastically curtailed. For a more aggressive open market operation, the
Bank Rate would have to be adjusted upwards.
12.0 Commenting on the Bank Rate, the Committee would set a target of
where the Bank Rate would be. To avoid the shock to the economy, the
Rate would be adjusted in small magnitudes from time to time until the
target was reached. The observation at that time was that adjusting the
Bank Rate downwards would lead to banks holding back their TB
maturities, thereby increasing the level of reserve money in the economy.
The only option would be to raise the Bank Rate. This would enable the
open market operation desk to mop up more liquidity from the economy
so as not to undermine the inflation target which the government and the
IMF had set at 10.0 percent by the end of the year. For the efforts above
to bear fruit, Government budget would have to be checked to avoid high
costs on the economy resulting from mop up operations.
13.0 Other members observed that the 10.0 percent inflation target
would be the core inflation, which could only be reached if the maize
price increase was discounted. In the Malawi program with the IMF,
however, what was factored in was the headline inflation. As such, the
end December inflation would not be 10.0 percent as argued by the IMF
but rather, it would be higher because of the maize issue.
Developments in the Foreign Exchange Market
14.0 Discussing developments in the domestic foreign exchange market,
the Committee noted that demand for foreign exchange was higher than
supply, leading to the dwindling of the gross official reserves from 5.1
months of import cover in September to 4.5 months in October. Total
gross international reserves also contracted to 5.3 months of imports in
October from 5.7 months in the previous month. It was observed that the
reserves trend was in line with seasonal expectations and that additional
pressure would likely come from Christmas-related demand for foreign
exchange.
15.0 In nominal terms, demand for foreign exchange amounted to
US$45.2 million while supply was US$7.7 million in October.
16.0 The Committee remarked that private sector demand had been
sustained at seasonally high levels, mostly due to traders taking profits
on the depreciation against the US dollar of the South African Rand and
the Zimbabwe dollar. In addition, ADBs continued to redeem their
FEXCODs to the tune of US$7.0 million in October to supply the
increased demand. It was observed that importers entered the market in
search of better ZAR deals. The Illovo Group purchased over ZAR20
million to service its debt. Fertilizer, fuel importers and retail chain
stores were amongst the major buyers of foreign exchange. Noticeable
also were the increased presence of small dealers, mostly cross-border
traders, particularly those going to Zimbabwe.
17.0 RBM sales of foreign exchange to the private sector rose to US$30.2
million in October from US$13.6 million in the previous month. Out of
this amount, 92.0 percent was sold to smaller banks with half to the
Finance Bank of Malawi alone. National Bank got US$2.5 million and
nothing for Commercial Bank. The latter instead placed a new FEXCOD
worth US$2.0 million. Sales of foreign exchange by ADBs rose from
US$66.6 million in September to US$69.2 million during the month
under review. Correspondingly, purchases of foreign exchange by the
RBM slowed down to US$0.8 million in October from US$6.1 million in
the previous month. ADBs purchased a total of US$41.4 million in
October.
18.0 In terms of market share, National Bank had regained its market
share on the supply side capturing 53.0 percent of all purchases from
the market from a low of 29.0 percent in September. Smaller banks lost
their share, as they were then purchasing 15.0 percent from 37.0 percent
in the preceding month. These market dynamics would likely reflect
themselves in exchange rate determination in the period ahead.
19.0 Regarding the exchange rate movements, the Committee observed
that the appreciation of the Kwacha against the US dollar was reversed,
as the local unit depreciated to K62.79/US$ in October from
K61.73/US$ in September. This was expected to continue in the months
ahead due to seasonal trends.
20.0 On the international front, the dollar gained somewhat against
European currencies as investors focused on military action in
Afghanistan soon after the September 11 attacks and waited for a clearer
picture of both the US and global economy. The euro failed to capitalize
further on the dollars discomfort during that period due to fears that the
European Central Bank would not respond by cutting interest rates.
21.0 The South African Rand continued to be hit by persistently low
liquidity and depreciated further in October.
Government Performance
22.0 Government resources during the month of October totaled
K3,252.0 million. Malawi Revenue Authority contributed 61.0 percent of
the total amount or K1,987.6 million. Other sources were: development
account (K347.5 million), TB proceeds (K338.9 million), general deposits
(K278.2 million), HIPC counterpart funds (K105.0 million), revenue
accounts and self-funded accounts (K116.7 million). The remainder came
from other miscellaneous transactions.
23.0 Total expenditure for the month stood at K5,128.9 million, of which
K4,867.5 million was for local payments and K335.5 million was for
NFRA towards maize procurement. TB redemptions and interest payment
on LRS amounted to K1,694.0 million.
24.0 The above gap of K1,876.9 million was financed by borrowing from
the RBM through Ways and Means Advances, which stood at K2,857.3
million by end October.
Monetary Developments in September
25.0 Monetary developments were contractionary in September as
money supply, at K20.974.2 million, recorded a month-on-month decline
of 6.1 percent from an increase of 1.4 percent in August. This outcome
owed largely to a decrease in net foreign assets as net domestic credit
actually rose. On annual basis, money supply slowed down to 21.4
percent from 32.5 percent in August. Despite this development, money
supply exceeded its September Program target of K20,355.0 million by
K619.2 million.
26.0 Net foreign assets of the banking system recorded a monthly
decrease of 10.1 percent and amounted to K16,385.2 million after
another decrease of 1.2 percent during the preceding month. This
situation was explained by declines in net foreign assets of both the
monetary authorities and the commercial banks.
27.0 Net foreign assets of the monetary authorities decreased by 9.3
percent and stood at K13,906.1 million from K15,327.9 million registered
during the month of August. The monetary authorities depleted most of
their reserves despite receipt of K1,130.1 million (US$18.5 million) from
DFID under the UK/Malawi Program Aid. Most of the foreign exchange
(US$13.6 million) was sold to the authorized dealer banks and the rest
was used to pay for maturing foreign certificate of deposits (FEXCODs)
and foreign debt service.
28.0 The commercial banks’ external position worsened by 14.7 percent
in September and amounted to K2,479.0 million compared to a marginal
increase of 0.5 percent recorded during the preceding month. This
outcome was mainly due to a depletion of their foreign currency deposits
(FCDs) to meet increased demand in the market.
29.0 Total net domestic credit extended by the banking system rose by
25.0 percent and amounted to K7,027.1 million after another increase of
15.5 percent during the preceding month. Expansion in credit was
noticed in all sectors, with government recording the highest increase of
K711.7 million, followed by the parastatal sector, K367.7 million and
private sector, K328.1 million.
30.0 Net domestic credit to government amounted to K899.0 million,
reflecting a monthly increase of K711.7 million compared to an increase
of K586.1 million in August 2001. This arose from the monetary
authorities as claims on commercial banks declined. Borrowing from the
monetary authorities on net basis rose by K750.4 million and this
reduced government’s repayment to the banking system of K1,999.3
million in August to K1,248.9 million. The credit was largely through
Ways and Means Advances, which stood at K1,611.0 million by endSeptember. These resources were used for reimbursement to commercial
banks and maturing Treasury bills.
31.0 Government borrowing from the commercial banks decreased by
1.8 percent and stood at K2,147.9 million due to a contraction in their
holdings of Treasury bills.
32/16/01 Net domestic credit to statutory bodies rose by K367.7 million
or 144.1 percent and stood at K112.6 million compared to a decrease of
7.9 percent recorded during the preceding month. The increase was
mainly due to a depletion of K345.0 million in deposits, the bulk of which
was withdrawn by ESCOM and a small amount by NRA. Lending to the
private sector rose by K328.1 million or 5.8 percent to K6,015.6 million.
33.0 On the demand side, the slow growth in money supply during
September was largely explained by narrow money as quasi-money
recorded some slight increase.
34.0 Narrow money amounted to K11,014.3 million, a decrease of 11.4
percent after increasing by 0.9 percent in August. Both currency outside
banks and demand deposits declined by 13.9 percent and 9.5 percent,
respectively, partly reflecting a decrease in demand for transactional
money balances.
35.0 Quasi money rose marginally by 0.7 percent to K9,959.8 million
after recording an increase of 2.1 percent during the preceding month.
This outcome was due to an increase in time and saving deposits as
foreign currency deposits (FCDs) declined.
36.0 Time and savings deposits increased by K497.9 million during
September mainly on account of the maturing TBs. FCDs decreased by
K332.9 million but this was more than offset by the increase in time and
savings deposits. The drop was seasonally expected as tobacco dollars
ceased to flow in following the closure of the auction floors. The decrease
was further accounted for by the sale of foreign exchange by some FCD
account holders due to high demand for foreign exchange as alluded to
earlier.
37.0 The Committee noted that the performance of the major monetary
aggregates was less satisfactory when viewed against the September
program targets. Money supply exceeded its target of K20,355.0 million
by K619.2 million. At K7,027.8 million, net domestic credit exceeded its
target of K2,037.0 million by K4,990.9 million. The major factor behind
this was the underperformance by the government sector. Net credit to
government was above its target repayment of K4,223.0 million by
K5,122.0 million. This was mainly necessitated by the non-receipt of
some pledged donor inflows. The private sector also exceeded its target
by K439.3 million while net credit to statutory bodies was below its
ceiling of K683.0 million by K570.4 million. Net foreign assets fell below
the end September target by K5,082.8 million.
RESOLUTIONS
38.0 The Committee considered the developments above and resolved to:

Maintain the current tight monetary policy stance.
ANY OTHER BUSINESS
39.0 The Chairperson explained that it was time the decision to adjust the Bank Rate
upwards was implemented. This was premised on the fact that government borrowing
was escalating, the yields were almost at par with the Bank Rate and the exchange rate
had started losing value. He intimated that should the Bank Rate remain unchanged,
the exchange rate would have to give. The problem was that the costs of exchange rate
depreciation are higher and take more time to reverse than those from interest rate
increase. He further observed that right now in Malawi, there were no real investors
because at the prevailing rates, the interest rates were very high already. The
Chairperson would, therefore, discuss this issue with the Minister.
40.0 The Committee discussed ways of reducing costs associated with open market
operations. Views on this were that Ways and Means Advances should be converted into
monetary policy Treasury bills. This had the advantage of increasing the portfolio for
open market operations. Other views, however, pointed to the fact that converting
would limit resources to the RBM that would be used to finance the cost of RBM bills.
In addition, the government would be locked in this and might not have resources at
the time the TBs matured, where as in the current system, the Ways and Means
Advances do get offset each time there is a donor inflow. In addition to the above
measures, others pointed to the fact that the RBM should move into the secondary
market to reduce liquidity injection into the economy.
41.0 Some members observed that the minimum statutory balance of K200,000.00 in
the government’s operating account was too little and as such it was time the figure got
reviewed. Other views were that it would be difficult for the government to operate if the
figure were raised at this point in time. This was in view of the fact that the government
was already struggling with the prevailing minimum balance.
42.0 The Chairperson stated that the minutes should be circulated in advance, together
with all other documentation. This would allow members to study the minutes before
the meeting so as to speed up the discussions.
DATE OF NEXT MEETING
43.0 The meeting was adjourned at 14:23 hours and to reconvene on 17
December 2001 at 14.30 hours.