RBM’s annual loss of K187.5bln should not be ignored as it has dire consequences on the Malawi economy—Chief Economist Chifipa Mhango

* In any developed economy, with a strong financial system, a reporting of RBM making losses would cause markets trembling

* For the very nature that a Central Bank — in a normal nature — makes profits than losses

* Because it is essentially a monopolistic business supplying an essential commodity which is the currency

* Hence its losses cannot be ignored

By Duncan Mlanjira

South Africa-based Malawian, Chifipa Mhango, who is Don Consultancy Group (DCG) Chief Economist, says the recent annual reporting of a loss of K187.5 billion by the Reserve Bank of Malawi (RBM) “should not be ignored as it has dire consequences on the Malawi economy.”

In its consolidated and separate annual financial statements posted on the bank’s website this week, Governor, Wilson Banda disclosed that during the year ended on December 31, 2022, RBM made a comprehensive loss of K187.5 billion — as opposed to a profit of K77 billion made in 2021.

The statement signed by the Governor and the Board Audit Committee chairperson, Maxwell Mkwezalamba, further said the bank also reported profit before foreign exchange revaluation of K93 billion in 2022.

“K20 billion was declared as dividend and distributed to the government in the year ended 31 December 2022 while K31 billion was transferred to general reserve account,” reads part of the statement, adding that in the year under review, RBM had foreign liabilities of K1.76 trillion against assets of K439.5 billion.

In his analysis, Mhango said on overall, RBM “has conceded that this is a going concern, while assuring us that the Reserve Bank has adequate resources to continue in operational existence for the foreseeable future.”

In his further analysis of the Reserve of Malawi financial position, Mhango also observed that: “The Bank’s consolidated foreign liabilities against consolidated foreign assets has been in a deficit position even in the year ending 2021, with values of MK1.3 trillion against MK499 billion, whilst making a profit of MK77.4 billion — thus implying the year ending 2022 reflects a deteriorating position, with Government deposits unchanged at MK405 billion, while overall consolidated expenses growing by MK23.6 billion from year 2021 to 2022 to reaching MK108.6 billion.

“In any developed economy, with a strong financial system, a reporting of RBM making losses would cause markets trembling for the very nature that a Central Bank — in a normal nature — makes profits than losses because it is essentially a monopolistic business supplying an essential commodity which is the currency, hence its losses cannot be ignored.

“In a real economic function, the implications of Central Bank losses would lead to undermining of monetary management, slow financial market development, as well as derail the attainment of Central Bank’s overall economic objectives such as price stability (containing inflation rate) and economic growth.”

The DCG Chief Economist further said it is for this reason that he strongly agrees to the sentiments raised by the RBM that its current financial position is a “going concern” and that it must be closely monitored, and in real terms.

“This loss of MK187.5 billion should not be ignored and taken lightly,” he continued. “In one of the reports published by a local media house in Malawi, the RBM Governor Wilson Banda is quoted as attributing the loss to the revaluation of the bank’s forex liabilities following the 25% May 2022 devaluation of the Malawi currency.

“However, I would also not ignore the consolidated expense line of personnel expenses and operating expenses as reported in the Annual Report which shows a rise of MK30 billion from year 2021 to 2022, which is also concerning.

“The RBM is a privileged entity and should not under any normal environment make losses for the very nature of its operations. Any investor hearing this message would be very sceptical of looking at Malawi as an investment destination of choice based on the risk profiling, as it would create an impression of a serious breakdown in financial discipline as well as doubts about the soundness of the entire financial system and the whole Malawi economy.”

Copied to Office of the President Lazarus Chakwera and Vice-President Saulos Chilima and the Minister of Finance & Economic Development, Sosten Gwengwe Mhango further said although the RBM has indicated that the MK187.5 billion loss is a going concern, “it remains to be seen as to what measures the bank will adopt in its operation strategy to turn around the situation”.

“We do not want to see the RBM in a state of unpreparedness to the point that there are no provisions regarding the financing of Central Bank losses; with Malawi Government even ignoring the situation until it develops to a significant macroeconomic and political topic.”

“In general, a Reserve Bank is supposed to make profits because of the seigniorage involved in currency issue. However, many Reserve Banks would make losses because of the costs involved in trying to preserve the value of the currency, and as they support government policy through quasi-fiscal activities ie subsidized bank loans provided by the Reserve Bank, thus outweighing seigniorage which is the difference between the face value of money such as a MK500 bill and the cost of producing it. We are hoping that this is not the current case for Malawi.”

He warned that the case of the reported loss “in simple monetary terms is the same as a Government fiscal deficit, to which expenditure exceeds revenue, and that means in future, if the situation continues, the Malawi Government would have to start incorporating the losses into its budget either directly or ensure reform of the Reserve Bank laws to ensure this is allowed if not in the current laws of Malawi as a bail out option”.

“The tough point would be to rationalize the financial relationship between the Malawi Government and the RBM to ensure market-related interest rates are charged on all its loans, including those to the Malawi Government — if this is not the current status — as well as take the risk of exchange rate changes into account in setting its lending rates, as accommodated by monetary policy considerations, while also relying on securities issued by the Malawi Government in conducting monetary policy.”

In conclusion, Mhango said RBM “plays a key function in monetary policy, financial stability and supervision, foreign reserve management, currency issuance, payment system (MITASS), as well as a Banker to Malawi Government. It is for these reasons that it cannot be allowed to collapse.”