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Forex reserves rise to 2.39 months

Increase in forex reserves has strengthened RBM’s position
Increase in forex reserves has strengthened RBM’s position

Official gross reserves rose to about 2.39 months import cover strengthening the Reserve Bank of Malawi (RBM)‘s ability to support the kwacha and importation of critical goods and services.

RBM’s daily market statistics indicate that the country’s import cover rose by about 12 percent to 2.39 months ($449 million) on February 10 from 2.08 months ($392 million) on January 10 improving the economy’s buffer against shocks.

Explaining the high forex reserves, during a monetary policy committee (MPC) meeting held on February 13, the RBM attributed the rising import cover to the central bank’s tight monetary policy it has been implementing since the May 7 2012 kwacha devaluation and floatation.

“The build-up of gross official reserves continued and stood at $402.4 million (2.1 months) in December 2013, the highest end-December outcome since 2005. This outcome was on account of generally consistent monetary policies since the May 2012 economic reforms,” reads the MPC minutes in part.

The RBM notes that regardless of the November 7 2013 aid freeze and the lean period the central bank has been able to maintain a high import cover.

In November last year donors operating under the banner of Common Approach to Budget Support (Cabs) announced the withholding of $150 million (about K60 billion), due to financial mismanagement.

Earlier, the International Monetary Fund (IMF) announced the suspension of aid over same concerns. However, the fund later released the withheld amount after the third and fourth reviews.

However, in the wake of decisions by the country’s major donors, experts and businesses pointed out that the aid freeze would worsen the lean period, push up interest rates and further worsen the depreciation of the kwacha.

But in the wake of the aid freeze the RBM has been implementing said it would further tighten the monetary policy to control money supply and rein in inflation.

The RBM said it would tighten the monetary policy through exchange rate adjustment in order to ensure continued improvements in the availability of foreign exchange in the market while at the same time dampening inflationary pressures.

And in the recent MPC minutes, the RBM notes that in response to the tight monetary policy the sharp depreciation of the kwacha which started in September, 2013, stabilised somewhat in December as demand for foreign exchange was contained by tight monetary conditions.

The MPC further noted that the local unit started appreciating especially in February, much earlier than anticipated.

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