The International Monetary Fund (IMF) has warned that high liquidity levels which are a result of Reserve Bank of Malawi (RBM) forex purchases may frustrate the fall of inflation currently at 24.6 percent as of February.
However, the central bank has said it will not stop the purchase of forex, but will engage in an aggressive tight monetary policy to manage liquidity and inflation.
The IMF, in a statement issued after its mission to Malawi led by TsidiTsikata for the fifth review under the three-year Extended Credit Facility (ECF), said the decline in inflation rate is being complicated by market liquidity expansion.
The mission, which met senior government officials, including Finance Minister Maxwell Mkwezalamba, RBM governor Charles Chuka and Secretary to the Treasury Newby Kumwembe believes the high liquidity levels is a consequence of forex purchases by the central bank which is meant to boost reserves.
“The mission welcomes the accumulation of international reserves by the RBM and its plans to further boost the level of reserves during this year’s tobacco season in order to provide the economy with a buffer against exogenous shocks.
“This will also allow the RBM to effectively intervene in the foreign exchange market to manage excessive volatility in the exchange rate arising from the highly season pattern of private foreign exchange inflows,” reads the IMF statement in part.
Malawi’ inflation remains a big problem to both consumers and businesses.
Inflation slowed to 24.6 percent in February 2014, according to the National Statistical Office (NSO), but the IMF targets single-digit inflation by end of this year from 23.5 percent in December 2013.
RBM spokesperson Mbane Ngwira told Business News on Saturday their policy is guided by both smoothening the fluctuation of the kwacha exchange rate and reining in inflation.
Ngwira argued the central bank cannot stop forex purchases to control the kwacha appreciation which he noted can hit K300 if left unchecked.
He said the RBM issues instruments including repos and long term bills.
Market liquidity has increased over the last few months with levels hitting K20 billion due to RBM forex purchases which is conversely kwacha injections into the economy being the main factor.