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RESERVE
BANK OF MALAWI
SPEECH
BY
DALITSO
KABAMBE (PhD)
GOVERNOR
AT
THE
INSTITUTE
OF BANKERS IN MALAWI 2019 ANNUAL LAKE CONFERENCE
THEME:
FINANCIAL SYNERGIES, A CATALYST FOR FINANCIAL INCLUSION
NKOPOLA
LODGE, MANGOCH
30 AUGUST, 2019
Ø The Director of Ceremonies, Ms
Maria Bauleni;
Ø The Guest of Honour, Mrs
Natalie Morris, Chief Executive Officer of EcoCash, Zimbabwe;
Ø The President of the Bankers
Association of Malawi, Mr Kwanele Ngwenya who is also the Chief Executive
Officer of NBS Bank;
Ø The 2nd Vice
President of the Bankers Association of Malawi; Mr McFussy Kawawa;
Ø Institute of Bankers in Malawi
Board Members;
Ø All Chief Executive Officers
here present;
Ø The Chief Executive Officer of
the Institute of Bankers in Malawi, Mrs Lyness Nkungula;
Ø Panelists and Speakers to this
Conference;
Ø Sponsors to this Conference;
Ø Distinguished Delegates;
Ø Ladies and gentlemen.
As usual, Mr.
President, I am delighted to once again join you in this year’s Institute
of Bankers
Conference. To begin with, let me join other Speakers
before me to welcome the Guest of Honour, Mrs. Natalie Morris, Chief Executive
Officer of EcoCash to Malawi and to this Conference and indeed all other participants.
Let me also applaud the choice of this year’s theme; Financial Synergies, a Catalyst for Financial Inclusion. It could
not have come at a better time than this and I will explain why shortly.
Distinguished Delegates, Ladies and Gentlemen,
we are gathered at a time the global economy has
lost momentum and slowed down following a decade and half of extraordinary
economic performance. In 2019, global growth is projected at a mere 3.2 percent
down from 3.6 percent in 2018 and 3.7 percent in 2017. The drag in economic
growth is due to a number of headwinds, key among them is the rise in trade
tensions and tighter financial conditions. We live at a time the
United States of America is reviewing its
trading arrangements with partners, the United Kingdom is reviewing its
relationship with its sister European Union nations and the global multilateral
trading system under the auspices of the World Trade Organisation (WTO) is
undergoing great uncertainty.
The second headwind
is the monetary policy normalization in advanced economies aimed at addressing
the prevailing negative interest rates. This
is also complemented by unwinding of
Central Banks balance sheets. Both these developments are leading to global
monetary policy uncertainty and tightening of financial conditions. The third
headwind is coming from China where the authorities are introducing necessary
deleveraging reforms for rebalancing their economy and making growth more
sustainable.
The last headwind is
arising from the current unprecedented levels of
stockpiles of debt. The global economy is
currently sitting on catastrophic debts which have never been seen before at an
all-time record of US$247 trillion in nominal terms which is equivalent to 305
percent of global GDP in 2018. Top among the list of borrowers are the United
States of America, China and Japan and together, they account for two thirds of
the global debt, exceeding their share of global output. On average, global debt
now exceeds US$114,000
in per capital terms and is weighing
heavily on the global economy.
Specifically, growth in advanced economies, is
projected at 1.9 percent in 2019 and 1.7 percent in 2020. The 2019 projection
is 0.1 percentage point higher than the April projection, mostly reflecting an
upward revision for the United States. In the United States, 2019 growth is
expected to be 2.6 percent and that is, 0.3 percentage point higher than the
April WEO, moderating to 1.9 percent in 2020 as the fiscal stimulus unwinds.
The
revision in the growth reflects
stronger-than-anticipated first quarter performance.
The emerging market and developing economy group
is expected to grow at 4.1 percent and 4.7 percent in 2019 and 2020,
respectively. Emerging and developing Asia is expected to grow at 6.2 percent
in 2019–20. In China, negative effects of escalating tariffs and weakening
external demand have added pressure to the economy in the
midst of a structural slowdown and
high dependence on debt.
Closer to home, in the Sub-Saharan Africa
region, growth is projected at 3.4 percent in 2019 and 3.6 percent in 2020, 0.1
percentage point lower for both years than in the April WEO, as strong growth
in many non-resource-intensive countries partially offsets the lacklustre
performance of the region’s largest economies. Higher, albeit volatile, oil
prices have supported the outlook for Angola, Nigeria, and other oil-exporting
countries in the region. But growth
in South Africa is expected to be muted in 2019 than projected in the April WEO
following a very weak first quarter performance, reflecting a
larger-than-anticipated impact of strike activity and energy supply issues in
the mining and weak agricultural production.
With regard to international oil prices, the IMF
projects that Brent crude oil prices are expected to be lower in 2019 and 2020,
averaging
$66.0 and $65.0 a barrel,
respectively. As of 29th August 2019, Brent crude oil price stood at
US$60.3 per barrel from US$64.8 per barrel as at end June 2019. The lower
prices are on account of weaker-than-expected global demand and greater-than-anticipated
U.S. oil production. However, geopolitical events in Middle East, civil unrest
in Venezuela, and slower-than-expected US production growth pose an upward risk
to oil prices.
Here
in Malawi, growth is projected at 5 percent up from 4 percent in 2018 and is expected
to rise further to 6-7 percent in 2020 and beyond. This is a matter of paramount importance, and I would suggest
non-negotiable. The economy needs to
take a new upward norm. As we are all
already aware, in the past 55 years of our independence, the economy has
suffered 7 major recessions all arising out of weather shocks in 1968, 1970,
1981, 1986, 1992, 1994 and 2001.
The country has also witnessed 2
significant
economic rebounds and understandably so, arising out of economic recessions as
the agriculture sector recovered in 1971, when we grew by 16.2% and in 1995
when we grew by 16.7%, which is our record growth year in post-colonial era.
While the current growth between 2003 and 2019 can be applauded for being in a
range 2.1 percent and 9.8 percent and devoid of any recession as compared to
the period 1964 to 2002 when there were huge volatilities ranging from the
worst ever
recession of -10.2 percent in 1994 to the record growth of 16.7 percent in
1995, the trend has generally been below par as weather shocks have weighed
heavily on the economy, as their frequency and intensity have persisted.
The problem has also been compounded by the fact
that unlike in other countries, where economies are more balanced, the economy
in Malawi is overly dependent on one sector, agriculture, and once hit, all other
sectors have retreated as well. As a result, while all other countries have
progressed in terms of total GDP and per capita GDP, from around US$100 per
capita per person is the early 1960s to somewhere around US$30,000 to US$60,000
per capita per person in countries such as South Korea, Singapore, Malaysia, China and others. Per capita incomes in Malawi have
only edged up from the same $100 per capita per person at our independence to
around US$400 per capita per person to date.
More
therefore needs to be done to invest in the energy sector, Agriculture and
value addition, mining, tourism and manufacturing to come to the new normal of upward
GDP growth trajectory which will help create jobs and improve the living
standards of people in this country. It is on this basis that I support the
choice of this year’s theme which is focusing on building synergies and
financial inclusion. We all need to work together as an economy and support
productive
sectors of
the economy so that we are able to move on.
On inflation, Mr. President, which is the preoccupation of the Central Bank, we
have come back to a new and desirable norm of low and declining inflation. We
are currently at 9.3 percent having come back down from an all-time worst ever
performance of 95 percent in 1995 and the trend is downward which is the most
promising trend since independence as the first 30 years of
our independence was generally characterized by steady
pick-up in inflation from 2 percent in 1967 to 95 percent in 1995. While we
appreciate though that the current success in bringing down inflation to single
digit and sustaining it there, we know that in other economies, these trends
and target is around 2 percent and that we need to aim for that in the medium
to long term. Currently, our medium-term objective is to get our inflation to 5
percent target by 2021.
With regard to the exchange rate, as you all know, the
Malawi Kwacha attained its current equilibrium in August 2016. Since then, it
has generally remained stable. However, in the second quarter of 2019, we experienced
a slight pick-up as a result of demand and supply dynamics during elections.
The trend has since been re-established and re-restored and we expect it to
continue.
Regarding interest rates, due to an improved
macroeconomic outlook, the policy rate has been revised
downwards by about 1,050 basis points from 24.0
percent in 2017 to the current 13.5 percent, with 350 basis points cuts effected
in the first two MPC meetings of 2019. At the current level, the policy rate has
established a new downward trend compared to a gradual pickup of 1964 to 1995
when the policy rate had gone up from 5 percent in 1964 to 50 percent in 1995.
Consistent with the decline in policy rates,
base lending rates for
Commercial
Banks have also followed suit. At 13.9 percent, base lending rates are the
lowest since 1980s and they have come down from an all-time peak of 56.2 in 2001.
This is also a new norm compared to the period 1964 to 1999 when base lending
rates had risen from 9 percent in 1964 to 53.4 percent in 1999. Going forward,
with medium term inflation objective of 5 percent by 2021, we wish to bring
down the policy rate to 11 percent and at that level, base lending rates will
also
follow.
I must also report that to improve the transmission of monetary policy further,
the Reserve Bank of Malawi in conjunction with the Bankers Association of
Malawi, has introduced the Reference Interest Rate. The Reference Interest Rate
is a weighted average of the Lombard rate, the Interbank rate (IBR), the 91-day
Treasury bill rate, and the Savings rate and at the moment, the weights are
64.8 percent, 25.0 percent, 10.0 percent and 0.2 percent, respectively. The Reference
Rate will
come into effect on 3rd September 2019 and
will be the new base lending rate for Commercial Banks.
Mr. President, the pick-up in economy, coupled with the
aforementioned decline in interest rates has resulted in the rebound of private
sector credit. I am pleased to report that Real Private Sector Credit Growth is
now positive and was recorded at 10.9 percent in July 2019, after mostly being
negative since 2012. In nominal terms, the outstanding
stock of credit to the private sector was recorded at K531.0 billion in July
2019. Compared
to the 55 years of our independence, one would argue that private sector credit
is re-establishing its trend it enjoyed between 1964 and 1983 and 2004 to
2011. We will need to stay this course
for some years to see businesses expanding, jobs created, more output realised
and more wealth created which will reduce poverty.
With
respect to public debt, which currently stands at 62 percent of GDP is a
substantial pick up from the trough of 30 percent in 2004 at HIPC, and a much
more improvement from the gradual pick-up in public debt from 50 percent in
1970 to a peak of 180 percent in 1995. At 33 percent, Domestic Debt is outside
the debt sustainability threshold of 20 percent while foreign debt is within
the debt sustainability threshold of 30 percent, at 27.9 percent. We will therefore need to do more to bring
down
domestic
debt to sustainable levels in the coming months and years.
Turning of the financial system, Ladies and
Gentlemen, our prudential analysis reveals that the Malawi financial system
continues to exude strength and resilience.
In the Banking sector, whereas our main preoccupation in 2017 was to
address capital issues which we successfully dealt with, our main preoccupation
in 2018 and 2019 was to deal with non-performing loans (NPL’s). I am absolutely
delighted that since June this year, our NPL ratios have reverted back to their
prudentially regulated levels of below 5 percent as they are now at 4.5 percent
as at end July 2019. This is quite commendable and
is the first time since 2012 that our NPL’s
have dropped to levels below the minimum regulatory requirements. The banking sector
is now well capitalized with capital ratios above regulatory benchmarks. Core
and total capital ratios stand at 16.4 percent and 20.4 percent and are
above the
regulatory minimum benchmarks of 10.0 and 15.0 percent, respectively.
Furthermore, the sector remains liquid as
evidenced by a liquidity ratio of 59.1 percent, which is above the regulatory
benchmark of 25.0 percent. What this means is that we now have a Banking System
which is well capitalized, with low NPL ratios, proper liquidity conditions and
profitable. This is extremely important for the well-being of our economy. As
the saying goes that the
health
of an economic system is measured by the health of its financial system. Moving
forward, we wish to see the financial system seriously investing in the growth
of the economy so that we all benefit from the growth of our economy, hence the
support of the theme of the Conference, building synergies with the private
sector. Similar successes and achievements can also be made of all other sub
sectors of the financial system in particular, the
insurance,
pensions, stock market, microfinance and others.
To strengthen the legal and regulatory environment of our
financial system, Distinguished
Delegates, Ladies and Gentlemen, let me update you on some of the steps the
Reserve Bank of Malawi has recently undertaken:
We have issued a Development Bank Licence to NBM
(i)
Development Bank. The Development Bank will focus on lending
small and medium scale enterprises. The issuance of the licence follows the coming
into effect of the development finance institutions regulatory framework in
2018;
We have drafted a Licensing
Directive on Community Banks and
(i)
the same has been submitted to
stakeholders for comments. The policy rationale for formulating a regulatory
framework for community banks is to promote financial inclusion and empowerment
of local entrepreneurs;
In collaboration with relevant stakeholders, we have drafted a Mortgage
Finance Bill, which is at
an advanced stage. The Bill seeks to create a
separate legislation and prudential requirements that
explicitly promotes mortgage financing in Malawi. The Bill will provide for the
licensing of mortgage finance institutions and also encourage existing
financial institutions to
(i)
participate in mortgage financing;
(ii)
In order to enhance financial stability and confidence
and protect smaller depositors, we have finalized the design and development of
the Deposit Insurance Bill which is awaiting Cabinet approval;
Considering that Cyber Security Risk is
pervasive
and an ever-expanding threat to the banking industry and may have adverse
impact on financial stability when crystallised; we have finalised drafting of
the Cyber Security Risk Management Guidelines for banks. The Guidelines seek to
prescribe minimum requirements to be adhered to by banks as
(i)
they manage cyber risks and are issued pursuant to Section
96 of Financial Services Act 2010. The draft Guidelines have been submitted to
stakeholders for review;
With the aim of assessing quality of service
delivery, we conducted a mystery surveillance of banking outlets in the
Southern Region, to
(i)
assess treatment accorded to financial consumers at the
banking outlets including banking halls and auto teller machines; the extent of
transparency and disclosure of information to customers; and overall compliance
with market conduct. Results were quite satisfactory, although there is still
room for improvement;
In a bid to have a robust Credit Reference Bureau
regime that is pivotal to financial stability, we have finalised the review of
Credit Reference Bureau (CRB) Regulations for the better carrying out of the
CRB Act and its administration. In collaboration with the International Finance
Corporation (IFC), a
(i)
member of the World Bank Group,
and the country’s two Credit Reference Bureaux, we conducted capacity building
workshops on credit reporting awareness;
In terms of financial
literacy, together with other key stakeholders, we continued to conduct and
monitor financial literacy initiatives aimed
(i)
at empowering
the general public to make informed financial decisions.
With these remarks, which I regard to be long quite frankly,
I wish to sincerely thank you all for your perseverance in listening in
silence.
I thank you all for your kind attention.
