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3.1. Monetary Policy Measures
Monetary policy application in Malawi resumes to be reinforced by inflation changing aspects particularly by the supremacy of the agricultural sector endeavours and the nation’s dependence on donor aid which adds approximately 40% of the nation’s budget. Inflation is perceived to advance with the main factors of enhanced food accessibility and tobacco trades from the month of April to September. However, it is argued that the nation’s monetary policy does not pursue to attend to these changing aspects but relatively to accomplish stability amongst yield growth and monetary sums as well as to smoothen the exchange rate developments with the certainty that the inflation dynamics will progress in the future as construction configurations react to macroeconomic stability in the perspective of a market-regulated exchange rate (RBM, 2018). The Reserve Bank of Malawi has a legitimate obligation to sustain price stability in Malawi. In so doing, the RBM targets at attain an inflation rate that is low and stable which is essential for sustainable macroeconomic growth. In order to expedite this, RBM has put in effect a Monetary Policy Committee (MPC) which considers on macroeconomic advancements in order to make a decision concerning the Monetary Policy measures (see Appendix II). The following are some of the monetary policy measures used by the government of Malawi to control inflation.
a) Rise in Bank Rate
This is one of the furthermost extensively utilised measure engaged by the RBM to control inflation. The bank rate may be defined as the rate at which the commercial bank such as National Bank, Standard Bank and FDH obtains a rediscount on loans and advances by the RBM. The rise in the bank rate causes in the increase of rate of interest on loans for the public in general. This directs to the decrease in total spending of people and entities (Pettinger, T. 2015). The foremost causes for the decrease in total expenditure of entities and business executives are the following;
i) Making the borrowing of money costlier:
This implies to the element that the increase in the bank rate by the RBM escalates the interest rate on loans and advances by commercial banks makes the borrowing of cash costly for the individuals and entities. Subsequently, entities and people delay their investment plans and anticipate for decrease in interest rates in future. The decline in investments lead to in the fall in the total expenditure and supports in regulating inflation (RBM,2018).
ii) Creating adversarial conditions for industries:
It entails that the rise of the bank rate could have a psychological influence on some of the entrepreneurs, entities and business executives. They might regard this circumstances adversative for running out their commercial endeavours as a result they lessen their expenditure and investment.
iii) Encouraging the tendency to save:
One of the most significant motive for decrease in total expenditure of business persons and entrepreneurs is a recognised statistic that entities usually choose to save cash in inflationary environments. Therefore, the total expenditure of entities on consumption and investment diminishes.
b) Direct Control on Credit Creation:
This element forms the main portion of the monetary policy as the RBM or central bank directly decreases the credit control volume of commercial banks by utilising the following approaches (McGuingan J.R., Moyer R.C. ; Harris F.H. (2005).
i) Performing Open Market Operations (OMO):
The central bank or RBM releases government securities to commercial banks and particular private corporations as a result, the money with the commercial banks would be disbursed on obtaining government securities thereby decreasing credit supply for the wide-ranging public (Pettinger, T. 2015).
ii) Altering Reserve Ratios:
This encompasses the rise or reduction in reserve ratios by the central bank (RBM) to decrease the credit creation volume of commercial banks. For instance, when RBM desires to decrease the credit creation volume of commercial banks, it escalates the Cash Reserve Ratio (CRR). Consequently, commercial banks such as National bank must preserve an enormous quantity of money as a reserve from their overall deposits with the central bank (Kwalingana, S. 2007). This might further lessen the borrowing capability of commercial banks and as a result, the investment by entities in an economy would also diminish.
• Solution to Question 2b:
3.2. The Main Elements of Fiscal Policy
In addition to the monetary policy, the government also applies fiscal procedures to regulate inflation. The two foremost constituents of fiscal policy are government revenue and government spending. The government manages inflation either by decreasing private spending or by lessening government expenditure, or both.
a) Controlling by decreeing government expenditure
The approach decreases private expenditure by rising taxes on private enterprises and corporations. When private expenditure is more, the government decreases its spending to regulate inflation. In spite of this, in the existing setting, decreasing government spending is not feasible for the reason that there may be particular on-going developments for social well-being that may not be adjourned. In addition to this, the government expenses are necessary for other sections, such as security, health, education, and agriculture. In such a situation, decreasing private expenditure is more desirable instead of diminishing government spending.
b) Controlling by decreasing private expenditure
When the government decreases private expenditure by raising taxes, entities and business executives reduce their total spending as well. For instance, if direct taxes on revenues are raised, the overall disposable earnings would decrease. Consequently, the overall expenditure of the private entities declines, which, sequentially, decreases money supply in the industry. Therefore, at the time of inflation, the government reduces its expenditure and increases taxes for dropping private spending. Fiscal policy’s political prejudice is that politicians are unwilling to effect contractionary fiscal policy for the reason that raising taxes and decreasing government expenditure on elements are politically unpopular as they may also have ab effect on public services like transport and education causing market catastrophe and social inadequacy (BBC News. 2014).
Overall, it can argue that despite the advantages of fiscal policy in controlling inflation, if it occurs that the government desires to solicit more cash to raise its spending again and arouse economic growth, bonds may be supplied to the general public. Since government bonds give a variety of advantages to consumers, entities and industries will acquire them in great deal. The private sector as a result will have small amount of cash left to invest. The decreased investment endeavours, may cause the economy to decelerate