The International Monetary Fund (IMF) country representative Geoffrey Oestreicher has said it is surprising that the local unit, the kwacha, is sharply depreciating despite the country sitting on high level of foreign reserves.
“With respect to the exchange rate, the recent developmentS are indeed surprising given the high level of reserve cover available to the Reserve Bank of Malawi [RBM] and continuing strong foreign exchange inflows from tobacco sales,” Oestreicher said yesterday.
Despite the country recording higher foreign exchange reserves than last year, the kwacha in recent weeks has continued to depreciate sharply, selling at a record K530 to the dollar in some authorised dealer banks (ADBs).
Applying an adjusted monthly foreign exchange requirement of $209 million, the central bank’s foreign exchange reserves were $714.1 million or 3.4 months of import cover at the of end June 2015, from $693.4 million (3.3 months of import cover) in May 2015 and $480.7 million (2.3 months of import cover) in June 2014.
For the country as a whole, RBM figures show that foreign exchange reserves amounted to $997.5 million (4.8 months of import cover) in June 2015, from $982.0 million (4.7 months of import cover) in May 2015.
Said Oestreicher: “In addition, the high level of reserves is an obvious asset that provided security, and should also afford the RBM a degree of discretionary influence on the exchange rate. However, the RBM will make its own decisions regarding the response to recent developments.”
His comment comes barely a day after the central bank imposed strict foreign exchange controls.
Commenting broadly on Malawi’s economic prospects, the IMF Malawi boss observed that growth in 2015 will be affected by the poor maize harvest, though the full effect is still being quantified.
He also said outturn for the year will remain largely policy dependent, in that meaningful reductions in inflation can still be attained provided fiscal and monetary policies are conducted in a restrained and appropriate manner.
But he warned that it would be counterproductive for RBM to cut interest rates before meaningful reductions in inflation.
“Conceptually, the interest rates on loans is set equal to the risk free rate of return available to banks plus a premium to cover the additional risk involved in lending to the private sector. I would, however, note that the Reserve Bank has the necessary tools to control interest rates,” Oestreicher said. n