Malawiâ€™s gross official reserves currently stand at $242 million, which is less than one month of imports of goods and services, latest market statistics have indicated.
Such a low foreign exchange reserve position comes at a time when the tobacco marketing season, which was expected to unleash the much-needed dollars into the foreign exchange market, is practically closed.
It confirms earlier projections by the International Monetary Fund (IMF) in its latest Regional Economic Outlook (Reo) of a 1.2 months and 1.1 months of import cover in 2012 and 2013, respectively.
The IMF forecasts are one of the lowest foreign exchange positions for Malawi in the last decade.
Import cover is simply a number of months a country can continue to support its current level of imports if all other inflows and outflows cease.
Generally, international experts agree that three months of import cover is accepted as a healthy amount of reserves for an economy.
“Malawiâ€™s official reserves, at $242 million, represent under one monthâ€™s import cover. We expect to see greater foreign exchange inflows and a consequent build-up of reserves to the required minimum of three months in the ensuing months,” says Alliance Capital Limited, a portfolio and investment management firm, in its latest market review.
The $242 million worth of reserves is an improvement from the $121 million reserves which represents 0.94 months of import cover as at May 18.
On Monday, the IMF executive board approved the much-awaited new three-year arrangement for Malawi under the Extended Credit Facility (ECF) worth $156.2 million which local economists hope could boost Malawiâ€™s current shaky foreign exchange position.
Following the IMFâ€™s boardâ€™s decision, the institution is expected to immediately disburse an equivalent of $ 19.5 million and boost Malawiâ€™s forex buffer.
Alliance Capital has also said in the latest commentary that it expects the approval of the IMF funds to unlock donor and bilateral support from other institutions and countries, which were previously withheld on account of poor economic and governance record by Malawi.
“The good news from IMF might well see the local unit appreciating and the central bank will likely regulate demand by, among other things, toying-around with the bank rate and liquidity reserve requirement until the currency stabilises at the optimal level,” says Alliance Capital.
Analysts agree that Malawi adequately needs foreign reserves to act as a fund to protect the country against shocks such as the collapse of terms of trade, resulting from a plunge in major exports.
Thus, the approved IMF funds, coupled with the reported increase in tobacco exports this year, could help Malawi sustain foreign exchange availability in the formal financial market and help meet the countryâ€™s import needs of critical goods and services such as pharmaceuticals, fuel and fertiliser.
Thus, it would also imply governmentâ€™s ability to easily service its foreign debt obligations and pay its expenditures overseas which could help diminish pressure on balance of payments (BoP) position and in the long-run improve Malawiâ€™s credit worthiness.
IMFâ€™s deputy managing director and acting chairperson Naoyuki Shinohara said on Monday after the approval of the new ECF package to Malawi that the new programme will help stabilise the macro-economy, increase international reserves to provide a buffer against external shocks, among others.
Malawi faced serious macroeconomic challenges in the last two years, manifested by a severe shortage of foreign exchange, which translated into shortages of critical imports such as fuel and drugs.