The shortage of foreign exchange on the market could be a blessing in disguise for the countryâ€™s banks currently hit by a liquidity squeeze, market analysts have said.
The analysts argue that the unavailability of foreign exchange is likely to lead to an accumulation of Malawi kwacha balances which should drive the market towards stability.
Reserve Bank of Malawi (RBM) latest figures show that as at September 28 2012, gross official reserves stood at $368 million (K115 billion), an equivalent of 1.96 months worth of import cover compared to $393 million (K123 billion), 2.09 months worth of import cover, the week before.
Of the total reserves, $176 million (K55 billion) or 0.94 months worth of import cover was sitting with the authorities to help prop up the weakening kwacha and also act as a buffer for payment of critical imports such as fuel, fertiliser and medical drugs while $192 million (K60 billion) or 1.02 months worth of import cover was sitting with the private sector.
The private sector has this year benefited from the proceeds of tobacco sales following a directive from the RBM that all proceeds from the countryâ€™s principal foreign currency earner that wires in about 60 percent of forex earnings be routed through the banks.
Malawi needs at least three months worth of import cover, or about $390 million (K122 billion), which is internationally recommended, to satisfy its import needs.
The countryâ€™s month import needs have jumped to $189 million (K60 billion) from $130 million (K41 billion), according to RBM Governor Charles Chuka, showing that the demand for foreign exchange is rising at a faster pace.
Malawiâ€™s banks have since May, when the kwacha was devalued by nearly 50 percent and subsequently floated, been facing liquidity squeezeâ€”a time cash resources are in short supply against demand.
The commercial bankâ€™s demand for cash has been so high that RBM was compelled to introduce a non-collateralised discount window on June 1 2012, now at 23.5 percent, to allow â€˜stressedâ€™ bank access funds to avert a possible bank failure.
Chuka confirmed that most of the banks are slowly coming out of discount window.
But a weekly market report from Blantyre-based Alliance Capital Limited this week noted that after four weeks of positive movements towards normalcy, the market “was inexplicably squeezed”.
The discount window accommodation ticked up to an average of K15.27 billion per day, at a weighted average of 22.25 percent, up from last weekâ€™s K11.7 billion at 22.87 percent.
Market analysts have advised that the resurfacing of liquidity squeeze after some weeks of normalcy is no cause for alarm, and the market is expected to witness “an even better liquidity position as towards October end”.
“Interestingly, the unavailability of foreign exchange is likely to lead to an accumulation of Malawi kwacha balances which should drive the market towards equilibrium. The Reserve Bank continues to make assurances that the financial market remains inherently stable,” says a weekly report from Alliance Capital.