The activities in the financial market are affected both by the domestic and international economic activity. Affecting the markets also is the political activity and political leadership under which the economy is operating. Changes in the monetary policy are dictated by external situation, that is the relationship between the country’s exports and imports. If imports are considered to be excessive it becomes imperative to slacken domestic demand by contraction of credit in order to reduce the demand for imports.

An Economy is always dynamic as there are a lot of activities taking place, allocating and re allocating resources. The Malawi economy at the moment is undergoing a number of economic activities aimed at stimulating the economy and raising investor confidence.

This paper will, however focuses on just a few that are currently in the limelight of events in the Malawi Economy, therefore it will be limited to the following;

The recent slashing of the base-lending rate.
The ongoing tobacco sales.
Withdrawal of International aid and prospects of resumption.
Political leadership in the country and fiscal discipline.

The reserve Bank announced the lowering of the bank rate to 25% from 35% with effect from the 1st of June. This move has caused the subsequent lowering of the lending rate by the commercial banks. This therefore means that the cost of loanable funds has been lowered and thus easing borrowing for consumers, businesses and other banking companies. This development therefore will serve to stimulate economic activity thus leading to the boosting of the real sector by redirecting investment to the sector, which is good for the Economy.

Again the money market rates within the same period dropped by an average 38% on all the fixed deposits, which is very significant indeed. The market average base-lending rate also dropped from 36%, before the adjustment of the bank rate, to about 27% at the adjustment, representing a 25% drop. This then means that commercial banks must embark to have enough funds to lend out, as investors will now be able to borrow more, and invest.

As a result of the adjustment of the bank rate, Government Treasury Bills’ and Reserve Bank of Malawi Bills’ yields also dropped significantly, going down by an average of 29% and 28% respectively by the end of June 2004.
The chain reaction resulting from the adjustment of the bank rate has served to reduce the gains derived from purchasing financial instruments, thereby reducing their demand. It is therefore anticipated that with the lower money market rates, funds initially invested in financial instruments will be available for re-investment in the real sector, thus stimulating real sector growth.

OUTLOOK for the SECOND HALF OF 2004

The exchange rate of the Malawi Kwacha with regard to the United States Dollar (USD) and other major trading currencies stabilized still June 2004 at MK108.9093 to the United States Dollar, at the end of the month.

If the current economic trends are to continue, and indeed they seem to, then the money market rates will drop all the more even during the second half of the year 2004.

The tobacco season is expected to extend up to the month of October because of the disruptions that occurred in the grading and quality assurance. This extension, coupled with the commencing of the tea season, is going to ensure a continued inflow of foreign currency. This therefore means that the exchange rate of the Malawi Kwacha with regard to the United States Dollar is expected to continue to stabilize for the most part of the last half of 2004. On the other hand, is likely to soar in July and subsequent months 2004.

The Reserve Bank of Malawi announced that it is targeting a Bank rate of 10% by December 2004.The current government’s priority is to curb corruption and promote of fiscal discipline. If they succeed then it will open doors for donor funding, which will in turn assist in the stabilization of the interest rate.