RESERVE BANK OF MALAWI

Transcription

1 [Type here] [Type here] RESERVE BANK OF MALAWI REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 ST DECEMBER 2016

2 [Type here] [Type here] RESERVE BANK OF MALAWI REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 ST DECEMBER 2016

3 [Type here] [Type here] Chairman Mr. Charles Chuka Governor Chairman Mr. Charles Chuka Governor Member Ms. Meg Kajiyanike Deputy Governor, Operations Member Dr. Naomi Ngwira Deputy Governor, Economics Member Dr. Grant Kabango Deputy Governor, Supervision Member Dr. Ronald Mangani Secretary to the Treasury Member Justice Isaac Mtambo, SC RTD Member Dr. Richard Mussa Member Mrs. Dorothy Ngwira Member Ms. Rosemary Mkandawire Member Mr. David Grimes

4 [Type here] [Type here] MISSION STATEMENT To ensure price and financial stability through the formulation and implementation of sound monetary and macro-prudential policies that are consistent with agreed national strategies. i

5 [Type here] [Type here] EXECUTIVE MANAGEMENT Mr. Charles Chuka Governor Ms. Meg Kajiyanike Deputy Governor, Operations Dr. Naomi Ngwira Deputy Governor, Economics Dr. Grant Kabango Deputy Governor, Supervision ii

6 [Type here] [Type here] HEADS OF DEPARTMENTS Chaika, N. Chando, P. Chinkono, C. Chitsonga, D. Chokhotho, R Gundani, J. (Mrs) Kanyanda, G. Kumbatira, M (Mrs) Malitoni, S. Mathanga, H. Mhango, P. Mkulichi, N. Mlelemba, E. Mseka, C. (Mrs) Mwale, M. (Dr) Mzoma, H. Ngwira, M. Stambuli, M. Tseka, R. Chief of Protective Services Head of Procurement and Stores Director, Human Resources Director, Information and Communication Technology Director, Internal Audit Director, Exchange Control Director, Administrative Services Director, Banking and Currency Management General Counsel and Bank Secretary Director, Financial Markets Director, Administration Director, Pensions and Insurance Supervision Director, Bank Supervision Director, Accounting and Finance Director, Research and Statistics Director, Micro Finance and Capital Markets Supervision Director, Governor s Office and Public relations Head of Oracle Support Centre Director, Strategy and Risk Management iii

7 [Type here] GENERAL NOTES [Type here] Separate items will not always sum to corresponding totals, owing to the rounding of figures. The following symbols should be noted in the text and statistical annex tables:.. Means not available - Means nil or less than one half of the significant digit shown * Means preliminary figures + Means revised figures Copies of the Report and Accounts may be obtained without charge from: The Director of Research and Statistics, Reserve Bank of Malawi, P.O Box 30063, Capital City, Lilongwe 3, Malawi. Phone: (265) Fax: (265) research@rbm.mw Any opinion expressed in this document should be regarded as solely that of the Reserve Bank of Malawi. The Bank wishes to express its appreciation of the co-operation and assistance from the Ministry of Finance, Economic Planning and Development, the National Statistical Office, financial, commercial and industrial organisations in supplying data and background material. iv

8 [Type here] [Type here] TABLE OF CONTENTS SECTION ONE OPERATIONS AND PERFOMANCE OF THE RESERVE BANK OF MALAWI Staffing and Staff Complement Capacity Building IMPLEMENTATION OF MONETARY POLICY DURING Introduction Monetary policy instruments and implementation Monetary policy assessment Challenges Conclusion DEVELOPMENTS IN THE GLOBAL ECONOMY World Economic Outlook Growth in Advanced Economies Growth in Emerging Market Economies and Developing Countries Growth in Sub-Saharan Africa DEVELOPMENTS IN THE MALAWIAN ECONOMY Production Agriculture Manufacturing Construction Mining and Quarrying Information and Communication Financial and Insurance Services Accommodation and Food Services Wholesale and Retail Trade Transportation and Storage Services Electricity, Gas and Water Domestic Consumer Prices Balance of Payments Current and Capital Account Balances Exchange Rate Movements Money and Credit Broad Money and its Components Counterparts to Broad Money Commercial Banks: Sources and Uses of Funds Reserve Bank of Malawi: Sources and Uses of Funds Government Securities Market v

9 [Type here] [Type here] 5.0 NATIONAL PAYMENT SYSTEMS Introduction Performance of Various Payments Delivery Channels in the Country MITASS Performance Internet Banking Services Mobile Banking Services Point of Sale Transactions Progress on Cross Border Payments System Reforms SADC Integrated Regional Electronic Settlement System (SIRESS) Regulation and Oversight Activities Challenges Conclusion SUPERVISION OF THE FINANCIAL SECTOR Introduction Ongoing Supervision Laws and Regulations Capital Markets Stress Testing of Banks Consolidated Supervision SECTION TWO ANNUAL FINANCIAL STATEMENTS Directors Report and Statement of Their Responsibilities STATEMENTS OF FINANCIAL POSITION STATEMENTS OF FINANCIAL POSITION (continued) STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME STATEMENTS OF CHANGES IN EQUITY STATEMENTS OF CASH FLOWS NOTES TO THE ANNUAL FINANCIAL STATEMENTS SECTION THREE STATISTICAL ANNEX TABLES Table 1: Reserve Bank of Malawi: Assets and Liabilities (K mn) Table 2: Monetary Authorities: Assets and Liabilities (K mn) Table 3: Commercial Banks: Assets and Liabilities (K mn) vi

10 [Type here] [Type here] Table 6: Money and Quasi-Money (K mn) Table 7a: Commercial Banks: Advances by Main Sector (K mn) Table 7b: Commercial Banks: Demand Deposits by Main Sector (K mn) Table 8: Principal Interest Rates Table 9: Balance of Payments Summary (K mn) Table 10 Selected Foreign Exchange Rates 1, Table 11: Commodity Imports and Exports1 Value f.o.b (K mn) Table 12: Domestic Exports by Main Commodity (K mn) Table 13: Gross Domestic Product by Economic Activity (K mn) Table 14: The National Composite Price Index (2000=100) Table 15: The National Composite Price Index (2012=100) vii

11 [Type here] [Type here] LIST OF TABLES Table 1: World Real GDP Growth (Percent) Table 2: Real Output Growth by Type of Activity (at 2010 prices) Table 3: Monetary Survey (K'mn) Table 4: Commercial Banks: Sources and Uses of Funds (K'mn) Table 5: Reserve Bank of Malawi: Sources and Uses of Funds (K'mn) Table 6: Banking System Liquidity Table 7: Open Market Operations LIST OF CHARTS Chart 1: Annual Percentage Growth in Deposits...20 Chart 2: Distribution of Domestic Credit..21 Chart 3: Distribution of Private Sector Credit by Sector...23 viii

12 [Type here] [Type here] LIST OF ACRONYMS AND ABBREVIATIONS AFRITAC AML/CFT APM ATS BCP CGU CCA CSD DSI DTI ECF EDF ESAAMLG ESF FIU FCD FSI FSTAP FVTPL GDP IAS IFRS IMF KYS LRR MACRA MASI MASWITCH MCA MEFMI MITASS MNNSS MNO MPC NABOP NDA NDDF NDTI NFA OMO POS Africa Regional Technical Assistance Centre Anti Money Laundering/ Combating Financial Terrorism Automatic Price Mechanism Automated Transfer System Basel Core Principles for Effective Banking Supervision Cash Generating Units Credit Ceiling Authority Central Securities Depository Domestic Share Index Deposit Taking Microfinance Institution Extended Credit Facility Export Development Fund Limited Southern Africa Anti-Money Laundering Group Exogenous Shock Facility Financial Intelligence Unit Foreign Currency Denominated Deposits Foreign Share Index Financial Sector Technical Assistance Project Financial Assets at Fair Value through Profit and Loss Gross Domestic Product International Accounting Standards International Financial Reporting Standards International Monetary Fund Know Your Customer Liquidity Reserve Ratio Malawi Communications and Regulatory Authority Malawi All Share Index Malawi Switch Centre Limited Microcredit Agency Macroeconomic and Financial Management Institute for Eastern and Southern Africa Malawi Inter-bank Transfer and Settlement System Malawi National Net Settlement System Mobile Network Operator Monetary Policy Committee National Accounts and Balance of Payments Net Domestic Assets Northern Division Dark Fired tobacco Non-Deposit Taking Microfinance Institutions Net Foreign Assets Open Market Operations Point Of Sale ix

13 [Type here] PRGF PTA SACCO SIRESS RBM REPO RTGS SADC SDDF WEO [Type here] Poverty Reduction and Growth Facility Eastern and Southern African Trade and Development Bank Savings and Credit Cooperative Organization SADC Integrated Regional Electronic Settlement System Reserve Bank of Malawi Repurchase Agreement Real-Time Gross Settlement Systems Southern Africa Development Community Southern Division Dark Fired tobacco World Economic Outlook x

14 SECTION ONE 1.0 OPERATIONS AND PERFOMANCE OF THE RESERVE BANK OF MALAWI 1.1 Staffing and Staff Complement In 2016, the Bank had a total workforce of 790 compared to 796 in A total of 28 employees exited the Bank compared to 16 in 2015 due to a number of reasons including deaths, expiry of contracts, retirement, resignations and termination. 1.2 Capacity Building In order to ensure that members of staff have requisite knowledge, capabilities and skills to carry out the Bank s mandate professionally and efficiently, the Bank continued its commitment to staff development through short as well as long-term training. In 2016, the Bank trained a total of 271 members of staff under various training categories. Out of the total number of trained staff, 161 were male and 110 were female, representing 59 percent and 41 percent of the total number of staff trained, respectively. During the year under review, the Bank trained 47 members of staff through 26 shortterm courses. In addition, the Bank conducted six in-house courses which attracted a total of 170 participants. With regard to long-term training, 14 members of staff who were pursuing postgraduate studies under the Bank s and self-initiated scholarships, both locally and abroad, returned to the Bank having successfully completed their studies. In addition, the Bank granted scholarships to two members of staff to pursue PhD in Economics. Furthermore, the Bank granted paid study leave to two members of staff who secured private postgraduate scholarships to pursue master s programme. The Bank is a member of a number of international capacity building institutions. For instance, the Bank participates in Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) activities. In the year under review, apart from participating in regional courses one member of staff participated in the Fellowship Programme. The Bank is also a member of Reserves Advisory Management Programme (RAMP), an initiative by World Bank Treasury aimed at among others; providing capacity building to official sector investment managers to help countries efficiently manage foreign currency and other investment portfolios to international best practice. During the period under review, 8 members of staff participated in RAMP activities. In the year under review, the Bank finalised the Leadership Development Program for Executive Management and Heads of Department and re-engaged Redpoint Consulting to facilitate the same programme to 41 managers across departments in the Bank. The managers were divided into three cohorts of less than 15 people. The first cohort was launched in September 2016 followed by two cohorts in October and November

15 2.0 IMPLEMENTATION OF MONETARY POLICY DURING Introduction Monetary Policy in 2016 generally remained tight and the Kwacha exchange rate remained relatively stable. This culminated into the steep disinflation process in the second half of 2016, against initial expectations of rising inflation, following two consecutive spells of drought episodes that hit the country in 2015 and Inflation slowed markedly during the last half of 2016, dragged down by falling food prices. Headline inflation fell to 20.0 percent in December 2016, from 23.5 percent in July 2016, and below the Reserve Bank of Malawi s projection of 25.4 percent. Year-on-year headline inflation dropped to an average of 21.7 percent in 2016, from the preceding year s rate of 21.9 percent. Non-food inflation declined from 18.7 percent in March 2016 to 15.3 percent in December Meanwhile, official reserves held by the Reserve Bank of Malawi stood at 2.9 months of import cover in December 2016, from 3.2 months of imports in December The Malawi kwacha exchange rate depreciated against the United States dollar to trade at K per US dollar at end December 2016, from K per US dollar in December However, there were some episodes when the exchange rate remained relatively stable during 2016, reflecting fiscal prudence and efforts by the Reserve Bank of Malawi to absorb excess liquidity from the banking system and maintain positive real interest rates. 2.2 Monetary policy instruments and implementation The Reserve Bank of Malawi used the Policy rate as the main instrument to signal the direction of monetary policy stance. The Bank maintained a tight monetary policy stance by keeping the Policy rate above headline inflation as well as ensuring that the Inter-Bank Market Rate (IBR) was always close to the Policy rate. This was implemented through Open Market Operations (OMO) and also operations on the official foreign exchange market. Furthermore, the Bank continued to monitor developments in Net Domestic Assets (NDA) and Net Foreign Assets (NFA) of the Reserve Bank of Malawi to ensure that the monetary base, which is the ultimate target, was in line with monetary policy objective of price stability. The Monetary Policy Committee (MPC) held four meetings in 2016, one in each quarter. In the first three quarters of the year, the Committee maintained the policy rate at 27.0 percent. However, the MPC adjusted the Policy rate downwards by 300 basis points to 24.0 percent during the fourth MPC meeting. This was against the backdrop of consistently falling inflation between July 2016 and November Though the falling inflation was observed on both food and non-food inflation, it was also noted that the stability of the exchange rate contributed to the disinflation process. Therefore, the marginal decline in official foreign exchange reserves to 2.9 months of imports in December 2016, from 3.2 months of imports in December 2015 did not compromise the overall monetary policy objective of containing inflation. 12

16 2.3 Monetary policy assessment The gain in disinflation has been marginal between 2015 and 2016, reflecting a relatively high degree of inertia in the determination of wages and prices. Headline inflation averaged 21.7 percent during 2016 compared to an annual average of 21.9 percent in Nevertheless, the disinflation process was supported by three factors: tight monetary policy stance, better food shortage management and communication. Food inflation in 2016 accelerated by 2.7 percentage points to 26.6 percent from 23.9 percent in 2015 whereas non-food inflation, a proxy of core inflation, eased by 2.9 percentage points to 17.1 percent from 20.0 percent in Food inflation for 2016 remained relatively higher than that of 2015 as a result of food supply gap in the 2015/2016 agricultural season due to effects of adverse weather conditions which appeared more pronounced in 2016 than in This pushed food prices up even during the harvesting period. Consequently, food inflation mounted between May 2016 and July However, the upward risk to food inflation was somewhat offset by prompt management of food price expectations as government announced programmed interventions which were designed to control rising food prices. The interventions included; timely publicizing of the planned importation of maize, declaration of a national disaster by the State President, and a call for humanitarian assistance from development partners who responded positively. The communication helped to moderate speculation, panic buying, hoarding of maize which could have put pressure on food prices on the market. As a result, maize prices remained stable since June 2016, contrary to the general expectation of rising food prices due to limited supply. On the other hand, the slowdown in non-food inflation in 2016 was attributed to a number of factors including tight monetary policy stance, stable international oil prices and relative stability of major non-food components. To a significant part, the observed stability in prices was on account of the lower exchange rate volatility than in the preceding year due to tight liquidity conditions that resulted into suppressed demand for foreign exchange on the local market. Further, as one of the monetary policy objectives in 2016, official foreign exchange reserves were maintained at the programmed level of at least three months of imports, except for the last quarter of the year when they were at 2.9 months. The underperformance was attributed to the Bank s intervention on the foreign exchange market aimed at dampening exchange rate volatility in certain months. 2.4 Challenges During 2016, the major challenge in the achievement of low and stable inflation emanated from supply side bottlenecks, particularly low food supply reflecting the impact of weather-related shocks on agricultural output. The effectiveness of monetary policy actions was restricted to the containment of second round effects of increased food prices on other market prices and moderating developments in the non-food inflation. 13

17 2.5 Conclusion Inflation rate maintained a declining trend in 2016, though marginal and averaged 21.7 percent compared to an annual average of 21.9 percent observed in 2015 and 23.9 percent in Inflationary pressure remained much more elevated in the year mainly on account of low food supply. As a result, the monetary policy stance was tight throughout the year. 3.0 DEVELOPMENTS IN THE GLOBAL ECONOMY 3.1 World Economic Outlook Global growth was estimated at 3.1 percent in 2016 from 3.4 percent in World economic activity was projected to pick up to 3.5 percent in 2017 and 3.6 percent in This was on the back of expectations of more robust global demand, reduced deflationary pressures, and optimistic financial markets. Nonetheless, structural impediments and risks to a stronger recovery remained tilted to the downside, especially over the medium term. 3.2 Growth in Advanced Economies Growth in advanced economies slowed down to 1.7 percent in 2016 from 2.1 percent in Albeit a decline from the previous year, the 1.7 percent growth in 2016 was stronger than anticipated due to a rebound in economic activities particularly in the United States, reflecting the assumed fiscal policy easing and an uptick in confidence after the November 2016 elections. Furthermore, despite the Brexit vote, Spain and the United Kingdom (UK) also registered stronger growth than anticipated. Nevertheless, estimated output fell below the potential level in a number of countries especially in the euro area. Projections indicate a steady pick up of 2.0 percent in both 2017 and Table 1: World Real GDP Growth (Percent) World Output Advanced Economies Emerging Market & Developing Economies United States Euro Area Japan Sub-Saharan Africa Nigeria South Africa Developing Asia Middle East & North Africa Source: IMF World Economic Outlook and NABOP 14

18 3.3 Growth in Emerging Market Economies and Developing Countries Growth in Emerging Market and Developing Economies (EMED) was estimated at 4.1 percent in 2016 from 4.2 percent in However, output was projected to increase by 4.5 percent and 4.8 percent in 2017 and 2018, respectively. Growth in China was stronger than expected which was explained by sound economic policies aimed at stimulating economic activities. In addition, Russia experienced a stronger growth than expected on account of improved oil prices. However, the overall growth in EMED was slowed down by recession in a number of Latin American countries such as Argentina and Brazil. 3.4 Growth in Sub-Saharan Africa Growth in sub-saharan Africa was estimated at 1.4 percent in 2016, representing a decline of 2.0 percentage points from 3.4 percent in The slowdown in economic activity was mainly explained by a decline in commodity prices, increased geopolitical and domestic conflicts, and protracted effects of drought in some countries. 4.0 DEVELOPMENTS IN THE MALAWIAN ECONOMY 4.1 Production Estimated Real Gross Domestic Product (GDP) growth slowed down to 2.7 percent in 2016 from 3.3 percent in The slowdown in the 2016 economic activity was a result of weather related shocks which affected the country and led to the under-performance of the agricultural sector. Major crops such as maize registered substantial declines. Consequently, the agricultural sector contracted by 0.2 percent in 2016 and this contraction had spill-over effects on the performance of other main sectors such as manufacturing, wholesale and retail, and transportation and storage. However, the economy was projected to rebound and grow by 4.5 percent in 2017, on the assumption of normal harvesting season and a more stable macroeconomic environment such as relative exchange rate stability and declining inflation trend. Table 2: Real Output Growth by Type of Activity (at 2010 prices) * 2016* 2017* A. Agriculture, forestry and fishing... (1.0) (1.0) (0.2) 6.8 B. Mining and Quarrying (4.6) C. Manufacturing... (1.1) D. Utilities E. Construction F. Wholesale and retail G. Transport and storage H. Accommodation and food service activities I. Information and communication J. Financial and Insurance activities K. Real estate activities M. Public administration and defence GDP in 2010 constant prices GDP in 2010 constant prices (MK billion)... 1, , , , , ,366.1 GDP current market prices (MK billion)... 1, , , , , ,676.2 Source: Reserve Bank of Malawi, National Statistics Office, Ministry of Finance, Economic Planning and Development 1 Annual Percentage changes unless otherwise stated * Indicates preliminary figures 15

19 4.1.1 Agriculture The agricultural sector was estimated to have contracted by 0.2 percent in 2016, largely attributed to a drop in crop production by 1.5 percent. Prospects for 2017 points to a resumption of favourable weather patterns. As such, crop production is expected to improve. According to 2 nd Round Agricultural Crop Estimates by Ministry of Agriculture, Irrigation and Water Development, maize production is expected to increase by 40.2 percent to million metric tons in Consequently, the agricultural sector is expected to grow by 6.8 percent in Tobacco The volume of tobacco production increased by 1.3 percent to million kilograms in 2016 from the amount produced in Of the total volume, burley tobacco constituted 89.6 percent, flue-cured, Northern Division Dark Fired (NDDF), and Southern Division Dark Fired (SDDF) tobacco accounted for 9.0 percent, 1.3 percent and 0.1 percent, respectively. About 72.2 percent of the total tobacco was sold under contract system while the balance was auction sales. The Integrated Production System (IPS) entails 80/20 percent proportions for contract and auction systems, respectively. Cumulatively, the all-type tobacco price averaged US$1.42 per kilogram in 2016, representing a drop of 19.1 percent when compared to the average price fetched in The lower prices were attributed to oversupply of the leaf on the auction floors due to overproduction on the domestic front. Nevertheless, relatively higher volumes partially compensated for the decline in prices. Consequently, total realization from the 2016 tobacco sales amounted to US$276.4 million, representing 18.1 percent decline from US$337.4 million realised in Tobacco production in 2017 was expected to drop by 36.6 percent to million kilograms. Tobacco Control Commission (TCC) reduced 2017 quotas for farmers in a bid to avoid overproduction in order to boost prices. Tea There was an increase of 9.1 percent in tea production in 2016 to 43.0 million kilograms from 39.4 million kilograms produced in The outturn was attributed to a pickup in commodity prices including tea prices on the international market. In terms of domestic sales through Limbe Auction market, a total of 7.7 million kilograms was sold in the year under review, for US$11.9 million at an average price of US$1.55 per kilogram. Sugar Sugar production for 2016 amounted to million kilograms while total sugar domestic sales amounted to million kilograms, valued at K86.8 billion. Meanwhile, a total amount of million kilograms were exported during

20 4.1.2 Manufacturing In 2016, the manufacturing sector grew modestly by 1.4 percent compared to a 3.8 percent growth in The slowdown in growth reflected challenges the sector faced such as energy problems, depressed aggregate demand and reduced raw materials from the agricultural sector following adverse weather related shocks. In 2017, the projected strong growth in the agricultural sector is expected to translate into a higher growth in the manufacturing sector since these two sectors are interlinked. As such, the sector was projected to grow by 4.9 percent in This notwithstanding, energy challenges are still expected to prevail in Construction Construction sector grew by 3.4 percent in 2016 from 3.5 percent in This reflected improvements in the working capital of construction companies following government s programme of clearing its arrears with the sector. Further, the reconstruction of damaged infrastructure caused by floods in some parts of the country also led to the growth of the sector. The sector was expected to grow by 5.1 percent in Mining and Quarrying Mining and Quarrying activities were projected to grow by 0.4 percent in Growth is expected to pick up in 2017, estimated at 1.6 percent. The projected growth is attributed to increased demand for coal due to increased production of flue cured tobacco as well as persistent blackouts Information and Communication Information and communication sector grew by 4.0 percent in 2016 and economic activity is expected to continue and therefore growth rate for 2017 is projected at 4.3 percent. The rolling out of new television and radio stations and increased telecommunications and internet services in the country contributed to the growth of this sector in Financial and Insurance Services The sector was estimated to grow by 5.5 percent in 2016 mainly on account of increased investments in financial markets such as the treasury bills as well as increased financial inclusion resulting from introduction of new financial services and technologies such as mobile banking. In real terms, credit to the private sector, the indicator which is used to measure economic development in the financial sector, was growing at a modest rate. This notwithstanding, non-performing loans were high due to high interest rates. The reduction of the Policy rate from 27.0 percent to 24.0 percent in November 2016 is expected to stimulate growth of credit to private sector, as such, growth for this sector in 2017 is expected to pick up to 7.3 percent Accommodation and Food Services The hospitality sector grew by 5.7 percent in 2016 mainly due to increased demand for accommodation as the donor community continues to implement the full board policy on most donor supported activities. In 2017, the sector is estimated to grow by 4.6 percent. 17

21 4.1.8 Wholesale and Retail Trade The wholesale and retail trade sector grew by 2.0 percent in 2016 compared to 4.9 percent growth rate in The decline in growth in 2016 was explained by a decline in disposable income, following a contraction of the agricultural sector. In 2017, growth is expected to increase to 6.6 percent as the agricultural sector is expected to rebound Transportation and Storage Services Transportation and storage sector was estimated to grow by 4.7 percent in 2016 compared to 4.3 percent growth rate registered in The importation of maize from neighbouring countries due to the food supply gap experienced in 2016 partly contributed to the growth in the sector. The sector is projected to grow by 6.3 percent in Electricity, Gas and Water Utilities sector grew by 0.4 percent in 2016 from a growth rate of 2.4 percent in The lower growth rate was explained by challenges in hydropower production due to low water levels and this also affected water boards as pumping of water largely depends on electricity. In 2017, the sector is projected to grow by 2.2 percent. The modest growth in 2017 is due to the fact that energy challenges are expected to continue as major rehabilitation and maintenance works are scheduled to be carried out at Nkula A. 4.2 Domestic Consumer Prices Headline inflation remained stubbornly high, averaging 21.7 percent during 2016, compared to an annual average of 21.9 percent observed in 2015 and 23.8 percent in This was mainly attributed to the comparatively poor agricultural yield across the country in 2015/2016 agricultural season as a result of weather related shocks which pushed food prices up. Consequently, food inflation in 2016 accelerated to 26.6 percent from 23.9 percent in 2015 whereas non-food inflation eased to 17.1 percent from 20.0 percent in However, the upward risk to food inflation was somewhat offset by importation of maize by both government and private traders as well as efforts by development partners to contain the food supply gap. These efforts were complemented by informal importation of maize from the neighbouring countries. This was evidenced by the downward trend in food inflation observed from August 2016 to December On the other hand, the slowdown in non-food inflation in 2016 was partly attributed to tight monetary policy stance as well as stable international oil prices which led to relatively stable fuel prices on the domestic market. 4.3 Balance of Payments Current and Capital Account Balances The current account balance was estimated to have registered a deficit of US$0.8 billion or 13.5 percent of GDP in This was largely explained by a negative merchandise trade balance. Exports were recorded at US$1.5 billion, a slight improvement from US$1.4 billion in 2015 while imports increased by 5.0 percent to US$2.3 billion in

22 The growth in imports was largely on account of maize imports. In 2017, the current account deficit is projected to remain at US$0.8 billion. The capital account balance remained virtually unchanged at US$0.1 billion in 2016 as in On the contrary, the financial account balance improved to US$0.8 billion from US$0.6 billion in Major items were foreign direct investment and other investments 1 estimated at US$0.3 billion and US$0.4 billion, respectively. The Overall balance of payments registered a deficit of US$64.8 million in 2016 and is projected to register a surplus of US$44.0 million in Exchange Rate Movements The Malawi kwacha depreciated against currencies of its major trading partners in 2016 except for the British pound. However, volatility of the kwacha was relatively lower than in the preceding year due to tight liquidity conditions that resulted into suppressed demand for foreign exchange on the local market. The kwacha was relatively stable against the US dollar in 2016 as it registered a depreciation of 9.1 percent compared to 41.1 percent in the preceding year. The local currency traded at K per dollar at end 2016 from K per dollar in Similarly, the kwacha lost ground by 5.1 percent against the euro and 12.6 percent against the yen to trade at K per euro and K6.20 per yen at end of the year in review. On the contrary, the kwacha firmed up against the British pound by 9.5 percent and traded at K per pound in The appreciation was explained by the weakening of the pound on account of investor uncertainty following Britain s exit from the European Union. Within the region, the kwacha depreciated against South African rand by 24.8 percent to trade at K53.28 per rand at end 2016, largely due to strengthening of the rand during the second half of the year. Against the Zambian kwacha, the local currency slid by 21.8 percent and traded at K73.72 per Zambian kwacha. The depreciation was driven by a stronger Zambian kwacha following improved investor confidence in the country s mining industry. 4.4 Money and Credit Broad Money and its Components Annual growth in broad money supply (M2) decelerated to 15.2 percent at the end of 2016 from 23.7 percent in This was mainly due to slower growth of foreign currency denominated deposits and term (time and savings) deposits in 2016 compared to 2015 (Chart 1). Foreign currency denominated deposits grew by K15.3 billion (7.4 percent) to K222.4 billion as at end of the year 2016 compared to a growth of K63.9 billion (44.7 percent) in Similarly, term deposits recorded a growth of K Composed of monetary authorities, general government, banks and other sectors 19

23 billion (9.9 percent) and stood at K279.0 billion in December 2016 compared to a growth of K42.3 billion (20.0 percent) in In contrast, demand deposits and currency in circulation registered higher growth in 2016 compared to Specifically, demand deposits and currency in circulation increased by K42.6 billion (20.6 percent) and K35.4 billion (32.0 percent) to K249.9 billion and K146.0 billion as at end-december 2016, respectively. In 2015, demand deposits and currency in circulation grew by K30.3 billion (17.1 percent) and K12.5 billion (12.8 percent), respectively. Consequent to the developments above, quasi money (QM) increased by K40.4 billion (8.8 percent) to K501.4 billion whereas narrow money grew by K78.1 billion (24.6 percent) to K395.9 billion in December Chart 1: Annual Percentage Growth in Deposits Counterparts to Broad Money On the asset side, pressure on monetary aggregates emanated from both the domestic and the foreign sectors. Net Domestic Assets (NDA) grew by K102.1 billion to K541.5 billion, solely on account of the banking system credit extension. Similarly, Net Foreign Assets (NFA) of the banking system recorded a growth of K16.3 billion in 2016 to K355.8 billion as at end December Net Domestic Assets Net Domestic Assets (NDA) of the banking system increased by K102.1 billion (23.2 percent) in 2016, compared to a growth of K51.2 billion (13.2 percent) recorded in The increase in NDA was anchored by credit extension to the domestic sector amounting to K152.9 billion. This was partly offset by a decline of K50.8 billion in Other Items (net), reflecting monetary authorities pursuance of tight monetary policy. 20

24 a. Domestic Credit In 2016, domestic credit increased by K152.9 billion (25.3 percent) to K757.3 billion compared to an increment of K146.1 billion (31.9 percent) recorded in The picking up in domestic credit was witnessed mainly in net claims on central government which increased by K130.8 billion to K339.8 billion compared to a growth of K55.6 billion registered in Credit to the private sector and statutory bodies also increased by K18.0 billion and K4.1 billion, respectively. In terms of distribution of the 2016 outstanding stock of domestic credit, private sector credit accounted for a larger proportion, followed by net credit to government and credit to statutory bodies (Chart 2) Chart 2: Distribution of Domestic Credit i. Credit to the Public Sector Growth in banking system credit to the public sector remained strong in A total of K135.0 billion was extended to the public sector, of which K130.8 billion (96.9 percent) was extended to the central government with only K4.1 billion (3.1 percent) channeled to statutory bodies. In 2015, central government accessed K55.6 billion from the banking system while parastatals accessed K765.1 million. Net credit to government from the monetary authorities grew by K160.7 billion (165.1 percent) to K258.0 billion in 2016 compared to an increase of K20.5 billion (26.7 percent) registered in Government borrowed through Ways and Means advances which were later converted to Treasury notes and Treasury Bills. This was reflected by K217.5 billion, K12.7 billion and K7.0 billion increases in the stocks of Treasury notes, Treasury bills and Ways and Means advances, respectively. However, these 21

25 developments were partly counteracted by government accumulation of deposits worth K39.7 billion and repayment of K36.9 billion in respect of maturing promissory notes. In contrast, net credit to government from commercial banks decreased by K29.8 billion (26.7 percent) to K81.8 billion compared to a growth of K35.1 billion (45.8 percent) in The slowdown reflected build-up of government deposits at commercial banks amounting to K25.9 billion, partly reflecting receipt of project funds through the banks and annual tax returns at the end of the year. Commercial banks holding of Treasury notes also decreased by K6.4 billion to K21.6 billion as at end-year Meanwhile, government borrowed K2.9 billion through Treasury bills and this increased the stock of the Treasury bills held by commercial banks to K109.6 billion as at end-year Table 3: Monetary Survey (K' million) End Period Balances Changes During Period A Net Domestic Credit 1. Credit to government (i+ii) 153, , , , , ,831.1 i. Monetary Authorities.. 76, , , , , ,653.8 ii. Commercial Banks.. 76, , , , , , Credit to statutory bodies 4, , , , , Credit to private sector (gross).. 300, , , , , ,979.9 B. Narrow Money (M1) 274, , , , , , Currency outside banks. 98, , , , , , Private sector demand deposits. 176, , , , , ,647.3 C. Quasi-money.. 354, , , , , ,380.5 D. Money Supply (M2) (B+C).. 629, , , , , ,457.9 E. Net Foreign Assets 241, , , , , , Monetary Authorities. 145, , , , , , Commercial banks.. 95, , , , , ,128.6 ii. Private sector Credit Total credit to the private sector increased by K18.0 billion (4.6 percent) to K408.3 billion at the end 2016 compared to a surge of K89.8 billion in The slowdown in credit to the private sector partly reflected the enforcement of strict credit standards by banks to reduce non-performing loans. Credit to the individual household sector increased by K33.3 billion, followed by commercial and industrial loans at K9.0 billion and Mortgages at K8.3 billion. In contrast, foreign currency denominated loans decreased by K25.8 billion in Further, commercial banks provisions for loan losses increased by K7.0 billion to K21.2 billion, reflecting deterioration of the quality of the banks loan book. In terms of economic sectors, as at end 2016, the wholesale and retail trade sector accounted for a large proportion of the outstanding loan stock at 25.0 percent, followed by the agriculture sector at 21.1 percent and manufacturing sector at 19.4 percent. The distribution to the rest of the sectors was as shown in the Chart 3. 22

26 Chart 3: Distribution of Private Sector Credit by Sector Net Foreign Assets NFA of the banking system increased by K16.3 billion to K355.8 billion as at end December The growth reflected the net effect of a K68.1 billion increase in NFA of commercial banks and K51.8 billion slowdown in the NFA of the monetary authorities. Commercial bank s NFA went up by K68.1billion to K131.2 billion as at end-december 2016 compared to a decrease of K32.6 billion recorded in The improvement in NFA of commercial banks was mainly noticeable between April and June, reflecting purchases of foreign exchange from tobacco farmers. In contrast to the developments at the commercial banks, monetary authorities NFA decreased to K224.6 billion in December 2016 from K276.4 billion in December Commercial Banks: Sources and Uses of Funds Commercial banks resources increased by K211.7 billion (20.6 percent) to K1,239.6 billion in 2016 compared to a growth of K231.8 billion in Unsectored liabilities were the major source of funds for commercial banks in 2016 as they accounted for K91.8 billion of the total accumulated resources compared to a contribution of K32.1 billion in This partly reflected growth in inter-bank lending in Private sector deposits accounted for K91.1 billion whereas the capital account contributed K35.0 billion to the accumulated resources. Resources from the official sector accounted for K17.8 billion to the accumulated resources and were explained by increases in government deposits of K25.9 billion and a fall in parastatals deposits of K8.1 billion. The only drop on commercial banks sources of funds was observed in liabilities to nonresidents (K23.9 billion) and was explained by decreases in liabilities to banks abroad in foreign currency and customer foreign currency denominated accounts of K22.9 billion and K1.1 billion, respectively. In terms of utilisation, the bulk of the resources were allocated to unsectored assets as it rose by K139.4 billion (47.0 percent) to K436.1 billion in Claims on the foreign 23

27 sector increased by K44.2 billion (42.5 percent) to K148.1 billion and was entirely explained by the commercial banks claims on banks abroad. Similarly, gross credit availed to the private sector increased by K18.0 billion (4.6 percent) to K408.3 billion in Commercial banks deposits with RBM and credit to state owned enterprises registered annual increases of K10.0 billion (10.3 percent) and K4.1 billion (81.5 percent) to K106.6 billion and K9.2 billion, respectively as at end year Table 4: Commercial Banks: Sources and Uses of Funds (K' million) End Period Balances Changes During Period A Sources of Funds 1. Private sector 484, , , , , , Official Sector Deposits. 60, , , ,944.7 (6,995.6) 17, Foreign Borrowing 17, , , , ,489.9 (23,948.4) 4. Capital Accounts.. 145, , , , , , All other liabilities.. 87, , , , , , Total ( ).. 796, ,027, ,239, , , ,702.5 B. Uses of Funds I. Domestic credit to: 7. Private sector (gross) 300, , , , , , Statutory bodies (gross) 4, , , , , Central Government (gross) 90, , , , ,158.2 (3,951.9) 10. Sub-total (8+9+10) 394, , , , , ,166.6 II. Deposits with Reserve Bank plus currency in banks , , , ,509.8 (16,975.5) 9,986.9 III. Foreign assets 112, , , ,581.5 (9,076.4) 44,180.2 IV. All other assets 174, , , , , V. Total (I+II+III+IV) 796, ,027, ,239, , , , Reserve Bank of Malawi: Sources and Uses of Funds Total resources of the RBM amounted to K1, billion in 2016, representing an annual increase of K271.9 billion (34.1 percent). The outcome was explained by increases in unsectored liabilities, foreign sector liabilities, official sector deposits, and currency in circulation of K152.5 billion (56.3 percent), K45.1 billion (26.7 percent), K39.7 billion (26.2 percent) and K35.4 billion (32.0 percent), respectively. The increase in unsectored liabilities was mainly on account of pursuance of tight monetary policy by the monetary authorities that resulted into increased mop up operations in Further, the growth in foreign sector liabilities partly reflected receipt of US$76.8 million disbursement from the International Monetary Fund (IMF) in June 2016 following successful Seventh and Eighth Reviews under Malawi s Extended Credit Facility (ECF) arrangement. Official sector deposits increased partly due to inflows earmarked for various projects received during On the usage side, the RBM increased its credit to government by K200.3 billion (80.6 percent) to K449.0 billion and its investment in unsectored assets by K78.3 billion (75.7 percent) to K181.7 billion as at end-december The increase in unsectored assets partly reflected growth in interest accrued on loans. 24

28 Table 5: Reserve Bank of Malawi: Sources and Uses of Funds (K' million) End Period Balances Changes During Period A. Sources of Funds i. Private sector: 1. Currency outside banks 98, , , , , ,430.1 ii. Commercial banks 2. Deposits plus till money , , , ,289.1 (18,780.0) (795.6) iii. Official sector deposits: 89, , , , , Sub-total (i+ii+iii). 301, , , , , ,315.7 iv. Foreign Sector 130, , ,052.6 (1,847.3) 38, ,117.1 v. All other liabilities 78, , ,579.2 (7,847.9) 193, ,495.2 vi.total (i+ii+iii+iv+v) 510, , ,069, , , ,928.1 B. Uses of Funds i. Domestic credit (gross).. 166, , ,043.2 (48,738.1) 82, , Statutory bodies Central Government.. 166, , ,043.2 (48,738.1) 82, ,335.0 ii. Foreign assets (gross) , , , , ,660.5 (6,700.1) iii. All other uses.. 67, , ,676.3 (7,371.9) 35, ,293.1 iv. Total , , ,069, , , , Government Securities Market Treasury Bills auctions conducted in the year 2016 attracted a sum of K572.7 billion. This compares to a sum of K593.3 billion that was tendered in 2015, representing a year on year decrease of 3.5 percent. This decrease is reflective of the tight liquidity situation that prevailed in the market due to intense open market operations. Of the tendered funds, a sum of K410.0 billion was allotted across all tenors. In addition to this, a sum of K131.5 billion was allotted on account of Ways and Means conversion into Treasury bills. Thus the year had a total issuance of K541.5 billion. The issuance met a total maturity of K505.8 billion leading to a net issuance of K35.7 billion. This compares to a net issuance of K34.6 billion that prevailed in the year Thus at the close of the year, the stock of Treasury bills had grown to K278.7 billion from K245.7 billion in 2015 and K207.1 billion in Government Securities Market Yields Average yields rose across all tenors and the all type yield subsequently rose to 27.9 percent. The 91 day tenor rose the most with 4.1 percentage points from 23.5 percent to 27.6 percent. On the other hand, the 182 and 364 day tenors average yields rose to 28.0 percent and 28.1 percent, respectively gaining 4.1 and 3.3 percentage points. The increase in the yields was on account of tight liquid conditions that prevailed in the banking system due to consistent open market operations Inter-Bank Money Market Banking system liquidity conditions were generally tighter during 2016 compared to the preceding year. This was evidenced by the drop in excess reserves to a daily average of K7.5 billion in 2016 from K11.3 billion per day in This was mainly on account of intensified Open Market Operations (OMO) that aimed at withdrawing liquidity from the banking system mainly through repos. Following tight liquidity conditions during the year, the interbank market rate (IBR) went up to as high as 28.5 percent on 1st September 25

29 2016 and continued to be above the Monetary Policy Rate until the end of the review year. The IBR increased to 25.3 percent in 2016 from 18.7 percent in In tandem with the liquidity conditions during the review period, the daily average interbank borrowing volume increased to K5.1 billion per day in 2016 from K4.2 billion per day in Likewise, Access on the Lombard Facility increased to K6.6 billion per day in 2016 from K3.5 billion per day in Table 6: Banking System Liquidity (K billion)) Daily Average Total Reserves Daily Average Required Reserves Daily Average Excess Reserves Daily Average Inter-bank Borrowing Daily Average Lombard Facility Access Inter-bank Market Rate (End Period) Open Market Operations Net government operations was the only source of injections in While K72.3 billion was injected through government deficit and a total of K41.0 billion was injected through government domestic debt activities. Consequently, a total of K113.3 billion was injected into the banking system through government operations. Countering the injections were net forex operations (K33.1 billion) and net OMO (K275.2 billion). Overall, K195.1 billion was withdrawn from the banking system in Table 7: Open Market Operations (K bn) Net operations supplying liquidity (+ = injection, - = withdrawal) Net Government Operations Government deficit excluding grants Revenue MRA Other, not including grants Expenditure Net Government Domestic Borrowing TB issues TB maturity Net Forex Operations Sales Purchases Net OMO Injections , , , , RBM bill maturities Maturity of 3-YR RBM bond Purchase of securities