After crashing against major trading currencies in 2013, the kwacha has stabilised in the last four weeks, thanks to Reserve Bank of Malawi (RBM) tight monetary policy.
According to RBM official exchange rates, the kwacha firmed against the dollar and the euro while the local unit marginally lost ground to the pound sterling by about 1.8 percent between December 24 and January 24.
The local unit appreciated against the rand by 5.8 percent during the same period.
But in 2013, the kwacha retreated against all major trading currencies prompting inflation to miss its target. Inflation rose to 22.9 percent in November 2013 while the annual average is projected to hit 28.6 percent from 21.4 percent in 2012.
The RBM late last year said it will further tighten the monetary policy to address challenges through the use of open market operations, bank rate and foreign exchange operations.
Last year, according to available statistics, the kwacha lost 29.9 percent against the dollar, crashed by 32.5 percent against the pound sterling and slipped by 5.7 percent against the rand. It also shed off 35.6 percent against the euro.
The RBM in its 2013 Economic and Financial Report for the third quarter noted that the local unit depreciated against major foreign currencies at the end of the third quarter due to lower donor inflows and a seasonal drop in tobacco proceeds during the period.
But in November last year in the wake of the aid freeze, the RBM in a policy statement said it was going to further tighten the monetary policy through exchange rate adjustment to ensure continued improvements in the availability of foreign exchange in the market while at the same time dampening inflationary pressures.
The central bank noted that the sharp fluctuations in the exchange rate that the country has experienced to-date, while not unique to Malawi, have largely been due to insufficient foreign reserves. The RBM therefore resolved to maintain an import cover of at least two months.
RBM spokesperson Mbane Ngwira earlier said the central bank has been targeting two months import cover as a rule of thumb, a measure which he described as credible.
Effective January 1, the RBM introduced the Lombard facility with a rate at two percentage points above the bank rate currently at 25 percent. The RBM argued that the facility would assist banks to manage their liquidity and ensure that they have access to funds.
Since December last year, the RBM has also engaged in open market operations issuing repurchase agreements (Repos), consequently yielding net withdrawals from the market to control money supply and rein in inflation.