Malawi's Central Bank start issuing government bonds

The Reserve Bank of Malawi said in its statement on January 24, 2008, that the fixed coupon rate for the Treasury note has been pegged at 12.5%.

“The proceeds of this issue will be to support Malawi Government development projects in the public sector,” the statement reads in part.

Government of Malawi uses the Treasury note to raise funds from the public.

Investors in Malawi have lauded government for taking this step as they say, “it will increase the investment platform on the market”.

Godfrey Jowah, who runs a financial institution, the Alliance Capital, said pension fund managers are set to benefit more since pension funds forms about 70% of investment funds on the Malawi market.

“Channelling the [pension] resources to long-term papers would ease pressure on short-term investments,” he said.

He said most pension funds are invested in short-term Treasury bills but now with this government bond, the money will now be invested in long-term accounts.

According to the bank statement, only bonds that are above 1 million Malawi Kwacha will be allocated.

Currently, the government raises money by issuing 30-, 181- and 272-day Treasury bills at an average 9% rate of return, which makes the new bonds more attractive.

Malawi is currently experiencing excess liquidity due to increased appetite to borrow which has been prompted by two consecutive cuts on bank rates last year, which forced commercial banks to reduce their lending rates.

The bank recently warned that the Malawi's inflation, which had hit single digits late last year, could be on its way up again due to excess liquidity and skyrocketing global fuel prices.

In its January 2008 Economic Newsletter, the bank had indicated that the market was expecting a major creative initiative to curb the growth of money supply.

The bank hoped that the initiative would have been through forex in the event of monetary injections like from its newly acquired diplomatic ally, mainland China or a medium to long-term mega-bond issue, which it said would quickly mop up excess liquidity that has been triggered by affordable interest rates.

A month ago, Finance Minister Goodall Gondwe told a local daily that they were waiting for interest rates to hit 10% before government could start issuing the bonds.

In August last year, the Reserve Bank of Malawi reduced the bank rate from 20 to 17%.

The Bank announced that the reductions were made since Malawi continued to register lower inflation rate, which is now at 7.5%.

“The inflation rate has been going down steadily; it slid into single-digit levels in January and has continued dropping,” said the bank's spokesperson Miriam Wemba.

Wemba added that strong economic growth has also necessitated the bank's decision.

The bank last reduced the bank rate in November 2006 from 25 to 20% due to almost the same factors that had the last year reduction.

Last year's August reduction was the fourth since President Bingu wa Mutharika took over as leader in May 2004. The rates first went down in June 2004 from 35 to 30%.

University of Malawi senior lecturer in economics Exley Silumbu, had warned that while the bank rate cut was a positive development there would be a spiral effect on savings, balance of payments and consumption.

He said the tradition has been that when the bank has reduced the bank rate, a cross-section of the interest rates in the financial system is affected.