Download MINUTES OF THE 25th MEETING OF THE MONETARY POLICY

MINUTES OF THE 25th MEETING OF THE MONETARY POLICY
COMMITTEE (MPC) HELD ON 9TH OCTOBER 2002 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
Mr. P.E. Chilambe – Secretary to the Treasury
In attendance:
Deputy General Manager, Blantyre Branch
Director, Research and Statistics
Director, Internal Finance
Manager, Financial Markets operations
Supervisor, International Operations
APOLOGIES
Dr. M. Kutengule – Principal Secretary, National Economic Council
Dr. M.M. Mkwezalamba – Principal Secretary, Economic Affairs
Director, Financial Market Operations
Director, International Operations
Director, Bank Supervision
INTRODUCTION
01/25/02 The meeting was called to order at 10.15 hours.
OPENING REMARKS
02/25/02 The Chairman welcomed all members present. He noted that
some members of the MPC remained in Washington after attending the
IMF/World Bank annual meetings.
ADOPTION OF AGENDA
03/25/02 The agenda of the meeting was adopted without any
amendments.
CONFIRMATION OF PREVIOUS MINUTES
04/25/02 Minutes of the previous meeting were adopted with some
amendments.
MATTERS ARISING
Minute 05/24/02 –Special Advance to Government
05/25/02 The Committee was informed that the issue of a special
advance to government had not been discussed during the meetings that
were held in Malawi between the Treasury and the IMF. This matter
would however await the IMF when they visit the country again in
November.
Minute 40/24/02 –Currency in Circulation
06/25/02 It was reported that the Financial Markets Operations
department had drafted a paper on causes of high currency in circulation
and measures to curb the situation. The final output would be presented
to the MPC at their next meeting. In a nutshell, however, it was reported
that currency in circulation was high and would remain so for some
months ahead due to an increase in economic activity and trading
especially in rural areas. Money withdrawn from banks to finance such
activities did not find its way back into the banking system due to lack of
banks and or uncompetitive savings rates. As a result traders kept
money under their pillows.
07/25/02 To target currency in circulation (CU) would be very difficult
given the limited instruments. One way to contain CU would be to reduce
or eliminate the Liquidity Reserve Requirement (LRR). This would release
some money back into the banking system and so allow open market
operations using the instruments that are available.
08/25/02 The Committee observed that if there were a reduction in LRR
while keeping the Bank rate constant, there would be no impact on the
lending rates because, empirically, lending rates have moved together
with Bank rate. This would mean that banks would now hold more funds
because they could not lend out at the current high interest rates. This
would induce banks to reduce the deposit rates and so increase the
spreads further.
09/25/02 Some members observed that there were many factors that
contributed to the high interest rates in the country, among which were:
government borrowing and premium charges in respect of default risk
and political risk.
10/25/02 To this effect, the Committee agreed that there were indeed
different perspectives on the same problems currently facing the
economy. As such, members deemed it necessary that NEC, Treasury
and RBM should meet before the IMF visit the country again in
November to identify the underlying problems in the economy and find
ways of sorting out the issue of high interest.
PRESENTATION OF PAPERS
Monetary Developments ( Paper No. 25a)
11/25/02 The Committee noted that money supply (M2) amounted to
K25,881.0 million in August, a marginal increase of 0.1 percent, monthon-month compared to 7.8 percent in July. This was on account of an
increase in net domestic assets, particularly borrowing by the
government. Net foreign assets, however, contracted during the month
under review. On the demand side, the increase in M2 was mainly on
account of narrow money that rose by K222.9 million due to an increase
in demand for transactional money balances. For the twelve-month
period, growth in money supply decelerated to 15.9 percent during the
month under review from 17.5 percent in July.
12/25/02 Net foreign assets of the banking system amounted to
K13,787.4 million, a decrease of 4.9 percent against an increase of 8.3
percent recorded in the previous month. The dip in international reserves
largely reflected the closure of the tobacco markets as well as non-receipt
of the pledged donor inflows. The situation was exacerbated by sales of
foreign exchange to the market as demand increased during the month.
13/25/02 Total net domestic credit extended by the banking system
amounted to K15,253.9 million, an increase of K1,233.6 million. All
sectors recorded an increase in demand for credit in August.
14/25/02 Net domestic credit to government increased by K1,070.3
million and amounted to K7,801.5 million. Of the total increase,
borrowing from the monetary authorities was K896.9 million compared
to K2,053.4 million in the previous month. This outcome was largely
explained by an extension of K514.5 million in Ways and Means
advances. The government resorted to the Central Bank borrowing
following a short fall in total government receipts (including proceeds
from Treasury bills) that amounted to K5,611.7 million against outlays
that totaled K6,125.9 million. The excesses in its outlays emanated from
debt servicing and the recurrent budget outlays. The situation was
further exacerbated by uptake of K128.7 million Treasury bills by the
Central Bank. Government’s indebtedness (net) with the commercial
banks rose by K173.4 million to K4,851.2 million due to an increase in
issuance of government securities.
15/25/02 Net domestic credit to parastatal organisations increased by
K14.1 million to K322.0 million due to maize loan repayments that
depleted their deposits to the tune of K49.0 million.
16/25/02 Lending to the private sector amounted to K 7,130.5 million,
up by K149.3 million on the preceding month mainly owing to increased
demand for financial resources for operational purposes.
17/25/02 The performance of all the major monetary aggregates, except
credit to government, was rather unsatisfactory compared to the
September program targets. At K25,881.0 million, money supply
overshot its end September target of K22,087.3 million by K3,793.7
million. Net foreign assets, credit to the private sector and other items
net were above their targets by K1,501.3 million, K1,531.0 million, and
K2,449.1 million respectively. Net domestic credit to government,
however, fell within the target for September.
18/25/02 Year-on-year inflation picked up in August to 16.5 percent
from 16.1 percent. Food inflation accelerated to 22.1 percent from 22.0
percent in July largely due to an increase in the prices of most cereal
products. Food costs were generally higher this year than last year due to
maize distribution problems. Non-food inflation also rose from 9.4
percent in July to 10.0 percent largely on account of the depreciation of
the Kwacha and the adjustment of fuel prices. For the month of
September, inflation was projected to fall within the range of 16.4
percent and 17.3 percent.
Government Finance (Paper No. 25c)
19/25/02 The Committee noted that government operations during the
month of September resulted in a narrower budgetary deficit compared
to August as revenues increased while expenditures were reduced.
20/25/02 Revenues during September amounted to K3,622.9 million,
an increase of K784.4 million on the August level. Deposits by MRA
amounted to K2,155.2 million, while the remainder arose from
departmental receipts (K104.1 million), development accounts (K932.6
million), HIPC (K323.3 million and other sources, K107.7 million.
21/25/02 Expenditures in September were K5,662.0 million, down by
K466.2 million on August. Major payments included reimbursements to
commercial banks of K2,201.0 million, payments towards maturity of
domestic debt including interest (K1,447.8 million), maize payments of
K1,138.8 million, and the remainder was payment towards external
obligations.
22/25/02 The operations above resulted in government budgetary
deficit of K2,039.1 million compared to a deficit of K3,299.7 million in
August. Ways and Means advances of K1,598.4 million and proceeds
from Treasury Bills amounting to K890.8 million largely financed the
gap.
23/25/02 The Committee observed that during the month of September,
out of K4,834.2 million outstanding Ways and Means Advances, some
K2,800.0 million had been converted into Treasury Bills. The government
had asked to turn the remainder into a long-term loan. It was however
intimated that the remaining part should be converted into Treasury
Bills as well because apart from being forgotten, long-term loans tend to
be expensive as their interest is usually fixed.
24/25/02 In a related development, it was observed that there is an
outstanding loan that had been converted in the 1980s (K440.0 million)
and had become long overdue. Government should clear this loan by
turning it into Treasury bills as well.
Developments in the Foreign Exchange Market (Paper No. 25d)
25/25/02 Gross official foreign reserves dropped from 3.30 months of
import cover in August to 3.23 months of imports in September. This
drop occurred despite receipt of some donor funds from the IMF
amounting to US$23.0 million during the month under review. The
overall foreign reserves position stood at 4.35 months of import cover in
September.
26/25/02 The drop in the reserves was seasonal as the tobacco markets
had closed and the RBM started selling foreign exchange to the
Authorised Dealer Banks (ADBs) following an increase in demand during
the month of September. Consequently, sales of foreign exchange to
ADBs amounted to US$25.0 million against nil purchases during the
month under review. Depleting the reserves further were maize import
payments and other transactions that amounted to US$13.6 million and
US$9.1 million, respectively.
27/25/02 It was observed that as maize payments increased, liquidity
and cash management would be crucial in the months ahead to avoid
depleting the reserves. At the time of the meeting, indications were that
the directly usable foreign exchange would go below the threshold in
November and would fall to negative US$100.0 million.
28/25/02 To this end, the Committee pointed out that transactions on
maize should be clearly accounted for. Local maize procurement should
be separated from foreign component to ensure that the total does not
exceed the 250 thousand metric tones that the government and donors
had pledged to secure. A status report should be compiled regularly and
presented to the MPC at their meetings.
29/25/02 Supply of foreign exchange during the month fell from a
weekly average of US$17.27 million in July to US$13.1 million in
September. Demand on the other hand rose steadily from US$12.70
million in July to US$17.1 million in September, largely reflecting
speculation that characterized the economy during the lean period.
30/25/02 Balances held in the Foreign Currency Denominated
Accounts (FCDAs) dropped from US$66.04 million in August to
US$58.28 million in September as account holders started releasing
their dollars in search for Kwacha for working capital requirements.
31/25/02 In line with the decrease in foreign exchange, the Kwacha
dropped from K76.6113/US$ in August to K80.3040/US$ in September.
This depreciation was expected to continue to the end of the year due to
uncertainty surrounding donor capital inflows.
32/25/02 The Committee, however, observed that the rate of
depreciation would depend on international developments as the Kwacha
would take advantage of the Dollar’s pressure against its major
currencies following the slide in its equity markets triggered by fears of a
possible US military strike on Iraq. The weakening of the Rand and the
Zimbabwe dollar against the US dollar would also give strength to the
Kwacha against those currencies.
Domestic Money Market Developments (Paper No. 25e)
33/25/02 The Committee noted that the average stock of reserve money
by end September was K10,065.0 million a decrease of K48.5 million on
end August. At that level reserve money missed the third quarter target
of K8,855.0 million by K1,210.0 million. The outturn occurred despite
intensive open market operations that resulted in a net withdrawal of
K1,711.9 million from the system.
34/25/02 A total of K3,184.9 million was injected into the economy
through purchases and maturities of the RBM bills. Liquidity withdrawal
through issues of RBM bills, sales of foreign exchange and sales of open
market Treasury bills amounted to K4,896.8 million.
35/25/02 Efforts to rein in reserve money through open market
operations were thwarted by low liquidity of the banking system. This
was evidenced by negative excess reserves and commercial banks’
frequent recourse to the discount window during the period under
review.
36/25/02 Following the extensive open market operations in September,
the average RBM bill yield rose from 40.28 percent in August to 40.37
percent. The average T-bill yield however dropped from 40.77 percent in
August to 40.10 percent.
37/25/02 Subscriptions of both bills were much lower in September
compared to August and the rejection rate also dropped from 22.0
percent in August to 9.0 percent. Despite the drop in rejection rate, the
RBM was unable to roll over both the Treasury bill and RBM bill
maturities by K266.0 million and K193.8 million respectively.
38/25/02 Consequently domestic debt stock represented by outstanding
Treasury bills and RBM bills held by the public other than the RBM
decreased by K459.7 million and amounted to K23,850.9 million by end
September. The overall debt stock comprising RBM bills, Treasury bills,
LRS and Ways and Means advances amounted to K33,158.2 million, an
increase of K1,149.1 million on August debt.
39/25/02 Preliminary estimates indicated that by end October, reserve
money would most likely amount to K10,551.5 million, overshooting the
fourth quarter target of K8,623.0 million by K1,928.5 million.
40/25/02 The Committee observed that with the available instruments,
it would not be possible to attain the end year target. It was agreed to
adjust both the Bank rate and the liquidity reserve requirement so as to
allow flexibility in monetary operations.
3.0 RESOLUTIONS
41/25/02 Having observed that money market conditions remained very tight, the
interest rate spread had widened and that reserve money continued to exceed its
targeted level, the Committee resolved to:

Reduce the Bank rate from 43.0 percent to 40.0 percent and

Implement measures to address large spreads in commercial interest rates.
3.0 ANY OTHER BUSINESS
42/25/02 There was no any other business to discuss.
4.0 DATE OF NEXT MEETING
43/25/02 The meeting closed at 15.50 hours and another one would be
held on 5 November 2002 at 09.00 hours.
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