These higher yield rates emanated to some degree from laxity in fiscal policy on the part of government where it failed to control expenditure and operate within its self-established fiscal limits, thereby resulting in its continued extensive local borrowing driving the rate up higher.

However the market has begun to see interest rates start to drop. The T-bill yield rates of 271 days tenor, on whose 4 auction-moving average yield is based the RBM's Bank rate, have been gradually dropping from a high of 84.93% to 61.6% as recorded on January 26, 2001. This represents a drop of 38%.

The 'invisible hand' of supply and demand should explain the drop in the yields. The increasing of the rates to 84.93% attracted a considerable

volume of Kwacha supply to the treasury (over K1,038 million worth of T-bills were applied for), so that even pegging the rate at lower than 38%, supply would still outbalance demand.

With the introduction by the RBM of its own RBM-bills, it has recently concentrated on 60-day tenors. These RBM-bills were introduced as a tool to reinforce monetary policy. Thus far this year the yield rates have fluctuated between 65.12% and 80.47%.

Some would argue that the methods that the authorities are implementing to reinforce monetary policy are directed more to short-term solutions than long-term stability. For example, the pegging of RBM's Bank rate to the T-bill yields means that as long as the government keeps on borrowing interest rates will remain high. Due to the short tenors that are applicable (all tenors are less than a year), T-bills are adding impetus to authorities to manage liquidity in a tight period.

Alternative investment products with longer tenors would appear to be more desirable if the targeted fiscal objectives are to be achieved.

Bonds with longer tenor i.e. Local Registered Stocks, normally issued for a period of not less than a year, may help prevent money from flowing back into the system so quickly. The other practical solution might be for the authorities to set the maximum rate for the issuance of T-bills/bonds, but not the amount to be bought and have financial institutions agree to underwrite for whatever is not taken up, thus checking the increase in the rate.

OUTLOOK FOR TOBACCO CROP
The current outlook for the 2001 crop that is the country's major forex earner is uncertain.

With the inconsistencies in rainfall in most parts of the country, especially the southern part of the country which experienced a dry spell during the past three weeks, the crop in the field is not as impressive as it has been for the past years. It is in shrinking shape and this could be a sign of potentially low quality produce this year. During the past season poor quality was blamed for the very low prices fetched at the auction floors.

Besides inconsistencies in rainfall, many farmers have been unable to plant and care for more tobacco crops due to cash flow constraints. Last year's poor sales resulted in farmers having insufficient funds to service the loans they obtained for the purchase of farm inputs. Some of those who did not honor their debt ended up having their farms and property liquidated by lending institutions. It is therefore expected that the volume this year could be lower than that of last year. On the other hand however, the central and the northern regions are expected to produce a higher quality crop than the south, having learnt from last year's outcome.

If the outlook for tobacco crop suggests a slump in tobacco revenue, further loss of value of the Kwacha is a distinct possibility down the road as a shortfall in the availability of foreign currency puts pressure on the Kwacha to devalue.