‘The reported RBM consolidated annual of loss of MK543.3bln 2023 financial year reflects a mismatch between fiscal, monetary and Trade & Industry policy environment in the Malawi economy’

Chief Economist, Chifipa Mhango

* Consolidated loss in RBM annual report released yesterday, July 16 had foreign liabilities of MK2.8 trillion against foreign assets of MK459.5 billion

* This cannot continue if the country is to rescue itself from the current economic challenge

By Duncan Mlanjira

Chief Economist for South Africa-based Don Consultancy Group, Chifipa Mhango observes that the reported consolidated annual of loss of MK543.3 billion (US$319.5 million) by the Reserve Bank of Malawi (RBM) in financial year ending December 2023, “reflects a mismatch between fiscal policy, monetary policy and trade & industry policy environment in the Malawi economy”.

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In a statement issued today, July 17, Mhango, a revered economist across Africa, said on June 15, 2023, he warned of the dire consequences of ignoring the losses which have now almost tripled from the previous MK187.5 billion loss reported in 2022 financial year.

“This cannot continue if the country is to rescue itself from the current economic challenges,” he said.

He quotes the consolidated loss of MK543.3 billion as reported in the annual report released yesterday, July 16 by the RBM further indicate that the had foreign liabilities of MK2.8 trillion against foreign assets of MK459.5 billion.

“Once again, the RBM has admitted this as a ‘going concern’ while assuring that the Bank has adequate resources to continue in operational existence for the foreseeable future,” says Mhango.

In further analysis on the Annual Report, the Chief Economist observed that: “The Bank’s consolidated foreign liabilities against consolidated foreign assets remains in a deficit position, with values of MK2.8 trillion against MK459.5 billion respectively, in financial year 2023, whilst making a profit of MK158.1 billion before foreign exchange revaluation in financial year 2023 against MK93.6 billion the previous financial year.

The Reserve Bank of Malawi

“In the same period, Government foreign deposits improved from MK405 billion to MK546.5 billion, while overall consolidated expenses grew by MK8.2 billion from financial year 2022 to 2023 to reaching Mk120.8 billion, which remains a concern.”

“The functions of the RBM, as defined by its six core mandates are around monetary policy, financial stability and supervision, foreign reserve management, a bank to Malawi Government, currency issuance and payment system, which are crucial to the Malawi economy.

“It is, therefore, imperative that the fiscal policy environment and trade & industry policy environments are supportive of its operations.”

He further said “while there is an appreciation of the impact of devaluation of the Malawi Kwacha on the losses due to the revaluation of the Bank’s foreign liabilities, however, there are other internal concerns in the RBM around consolidated personnel expenses, which show a rise of MK10.1 billion from financial year 2022 to 2023 — to reaching MK58.4 billion, thus representing 48% of total consolidated expense”.

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In his recommendation to the RBM, he suggests to take the following view:

* To reduce its sports and social activities line under operating expense, which increased from MK1.2 billion to MK1.97 billion between financial year 2022 to 2023, due to sponsoring of tournaments — this is not in line with RBM functions, as it is not a commercial or retail bank that needs to market itself.

* On staff training under personnel expense, the RBM should consider localisation of its staff training by utilising local institutions such as University of Malawi, especially for Masters’ degree courses in Economics than preference of international institutions.

“It is important that Government entities show confidence in the country’s own higher learning institutions.”

* The RBM, through its auditors should also disclose more details around the other staff costs personnel expense line, as it requires attention considering that its MK2.4 billion and reflects a rise of MK600 million from the previous financial year 2022.

* There is also a going concern in the wage bill of the Reserve Bank, which increased by MK11.1 billion to reaching MK40.4 billion in period under review — something that the Bank should observe carefully in terms of recruitment management or annual staff salary adjustments.

“I continue to hold the view that, the RBM should stick to its six core mandates and pull out its involvement in entities such as Export Development Fund, which is a Development Finance Institution facilitating export-led investments in Malawi, created on 6th February 2012.

“This is out of the RBM mandate and should urgently be delinked from RBM and relocated under the Ministry of Trade & Industry.”

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On the Fiscal policy side, Mhango recommends that:

* The Malawi Government, through the Ministry of Finance, should reflect carefully on its spending appetite, as its excessive borrowing from the RBM and international financial institutions to support this abnormality is affecting monetary policy stability (inflation rate), which the RBM is failing to manage — currently at 33.3%, and with Bank Policy lending rate at 26%.

* The much-promised restructuring of Government expenditure towards a 30% development projects is yet to be realised, as between August 2023 to April 2024, Malawi Government has spent MK746.3 billion on development projects, which represent only 22.4% of total expenditure, while administration expenditure continues to dominate totalling MK2.3 trillion — thus 77% of the total expenditure.

“It is important that if Government is considering borrowing as the only option due to limited revenue base, then that is directed towards productive expenditure of the Malawi economy.

On the Trade and Industry policy side, he said: “It is worrisome to note that despite the motivation of the Kwacha devaluations, which hindered around driving exports to boost foreign exchange earnings, that is also yet to be realized, as the country continues to import more than it exports — thus leading to prolonged trade deficit.

“Since August 2023 to April 2024, imports into Malawi show a stead pick, while exports show a declining trend in value terms, with latest data of April 2024 showing imports value of MK372.6 billion (US$212.8 million), exports value of MK54 billion (US$31 million) — thus leading to trade deficit of MK318.4 billion (US$181.8 million).

“The Malawi Kwacha devaluations have in fact brought more misery to Malawians, as prices of goods and services have rocketed to record high, thus creating even more challenging situation for the Reserve Bank of Malawi’s price stability role.

“Malawi should, therefore, put more efforts in high quality value addition manufacturing of its raw agriculture production, for import substitution and international markets.”

In conclusion, the Don Consultancy Group DCG Chief Economist said: “The Reserve Bank of Malawi situation of loss making will continue to prevail under the current fiscal policy framework and also with the trade & industry policy that is not responsive despite devaluations of the Malawi Kwacha.”

Mhango is Director of Economic Research & Strategy at Don Consultancy Group and he has copied his statement to Malawi Minister of Finance & Economic Development, Minister of Trade & Industry and the Malawi media houses.

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