Malawi's central bank kept its benchmark bank rate unchanged at 25.0 percent, saying inflation was in line with recent forecast and it wanted to allow more time for the recent monetary tightening to work its way through the economy.
But the Reserve Bank of Malawi (RBM) said the "risks in the financial system remained elevated due to the high inflation and interest rates" with the ratio of non-performing loans rising to 8.2 percent in November from 7.8 percent in the previous month.
Malawi's central bank had the dubious honor of being the top rate-raiser in 2012, increasing rates by 1200 basis points, bringing its rate to the second highest in the world after Belarus' 30.0 percent.
Malawi's inflation rate rose to a new year-high of 33.30 percent in November from 30.6 percent in October but average prime lending rates in the money markets were 31.4 percent and thus "marginally negative," the bank said in a statement following a policy committee meeting on Jan. 10.
Money market conditions remain tight, the RBM said, noting that some banks have resorted to the central bank's collateralized discount window and the average Treasury bill yield rose to 23.14 percent from 22.0 percent the previous month.
Money supply growth eased to an annual 18 percent in November from 22.7 percent in October and gross credit to the private sector dropped to 200.4 billion kwacha from 208.2 billion. Foreign exchange reserves also dropped to US$ 126.5 million, about 0.7 months of import cover, as a result of continued intervention in the foreign exchange market, the RBM said.
Malawi is one of the world's poorest countries and heavily dependent on tobacco exports, which account for almost half of its export earnings. But it was hit by a poor maize crop due to drought and by a halving of its tobacco crop - and thus foreign exchange shortages - due to lower planting during a period of currency overvaluation.
Shortly after taking office last year, Malawi's new president, Joyce Banda, devalued Malawi's kwacha currency by 50 percent and moved to a flexible, market-based exchange rate system. She also removed restrictions on foreign exchange transactions, which helped stop the overvaluation of the currency, according to the International Monetary Fund.