Tuesday, May 8, 2012
RBM independence is long over due
President Mutharika has used every opportunity not to devalue the Malawi Kwacha. He has also gone flat out to blame forex bureaus’ as conduits for leakage of foreign exchange out of the country. In reaction RBM moved in and raised capital requirements for forex bureau operators and went further to instruct them to align themselves with authorized dealer banks or faced closure. The battle was fought in courts to no avail. Most of them closed business, and some jobs got lost and those that remained, found themselves in convenience business partnerships with banks. The banks of course smiled. They established subsidiaries companies called “forex bureaus” or whatever you name it. It just rekindles the debate of RBM independence and its effect on the Malawi economy. Have matters of monetary policy have now become a responsibility of state house or capital hill? Has the Malawi government tight grip on RBM yielded the macro-economic benefits that this country yearns for such as employment, low and inflation interest rates? After all the high GDP growth induced by fertilizer subsidy did not even require a tight control of RBM. We can achieve higher economic growth without State House telling RBM what to do.Generally, I have no doubts. The economic brains at RBM are smart enough and are some of Malawi’s finest in matters of monetary policy. While RBM remains a public institution and hence subject to control by its shareholder, Malawian citizens, through elected public leaders on trust, issues of independence over monetary policy and financial prudence are be better managed without control of statehouse. Examples abound. We can look at the issue of closing of forex bureaus or simply making their business deliberately difficult, which in my opinion was motivated by presidential accusations of the former siphoning forex. Its usurping the powers of a central bank and a vote of no confidence about their supervisory functions. I don’t think they failed. Were forex bureaus really siphoning forex? Whatever the case, it does raise some questions about some demerits of the executive arm of government or simply, the presidency directing RBM what to do. A fairly independent RBM on the policy front is a fair go to effectively implement monetary policy and price stabilization, one critical incentive a serious minded investor looks for.We can see that such interference is now making the job of the RBM more difficult, traditionally price stabilization or inflation control. Closure of forex bureau just gave Malawians keen to conduct business legitimately to explore alternative markets for foreign exchange amid the mediocre service of our commercial banks, plus the monopoly they now enjoy in the forex market. While forcing forex bureaus to align themselves with dealer banks makes some supervisory tasks easier, forex monopolies owned by banks have spilled but not competitive, because exchange rates are determined by State house. Unfortunately, the forex has not gone into the banks and easily slipped onto the street, and its scramble is inducing high inflation. With RBM loss of Malawi Kwacha control and management, its ability to contain inflation is compromised. All I am saying is, RBM is much better placed to manage exchange rate and money supply independently as opposed to state house. Framers of the RBM Act had this in mind. After all forex bureaus were by law required to maintain foreign currency denominated accounts with authorized dealer banks and RBM had better knowledge of money circulating around than now.Similarly, matters of exchange rate control while debated at length with contrary views, still put in question why our central bank is better placed to manage the kwacha unlike the President. The Reserve Bank of Zimbabwe does not have a currency to manage, and I am afraid this is a path we have taken. The ZIM dollar was controlled and managed from State House. It is now a good souvenir. Without dwelling much on merits of devaluation or maintaining the status quo, the price stabilization goal of the RBM has now become more complex. As we anticipate further increases in inflation in the coming months, not from seasonal factors but rather general macro-economic collapse, it will be political suicide for state house to let RBM decide competently on a rate rise. At the peak of US economy meltdown, Barack Obama was quite busy trying to convince a conservative led Congress to bail out the Detroit big four car companies and Wall Street banks while Ben Bernake, the Fed Chairman (Reserve Bank of the US) took upon himself to explore different measures such “quantitative easing”, flooding the money markets with USD, a ‘polite’ devaluation technique to fight the recession. Their relationship was mutual and eliminated any conflict between monetary and fiscal policies. But what I see in this country is very different. It appears the President determines monetary policy and potentially taking over the role of the central bank. At the same-time, he determines fiscal policy at capital hill without question as evidenced by a unilateral decision to host expensive summits such as the AU without parliament approval and purchase of a jet without parliament approval. I believe Statehouse or the presidency should loose grip of RBM and let it make independent decisions on aspects of monetary policy that are in the best interest of the country and the economy in general. The presidency and cabinet need to focus on their dream of making Malawi an export led growth economy. No one needs to educate him on this as the DPP manifesto is very clear. Forex flows into countries whose growth is export led. Our new friends from China are classic example. More concern should be given to reducing unemployment and attracting foreign direct investment as opposed to telling RBM what the exchange rate should be or which forex bureau is siphoning forex out of the country and needs closure. Systems of bank and non-bank institutions supervision are well established at RBM and managed by very competent people. The President should be more concerned with numerous power outages, unemployed youths, unpaid primary school teachers, a collapsing health system, government red tape in establishing new businesses amongst others. These are supply side issues that are quite critical in making Malawi an attractive business investment destination.