Malawi’s gross official reserves have sunk to a low of $180 million (K62 billion), confirming earlier fears of continued scarcity of foreign exchange in the formal financial market to meet the country’s critical import needs.
Such an amount of reserves is an equivalent of 0.96 months of import cover which is way below the internationally recommended three months cover, an equivalent of $564 million (K195 billion, at the current exchange rate).
Generally, economists agree that the minimum of three months of import cover—the number of months a country can continue to support its current level of imports if all other inflows and outflows cease—is accepted as a healthy amount of reserves for an economy.
The Reserve Bank of Malawi (RBM) latest market statistics indicated that, as at January 11 2013, Malawi was sitting on gross foreign exchange reserves worth $189 million (K65 billion) before tumbling to $180 million on January 18 2013.
Alliance Capital Limited, a portfolio investment management firm, in its weekly market review, noted that after three consecutive weeks of increasing import cover, the foreign exchange reserves position changed direction.
The diminishing foreign exchange position is not good news for Malawi, a country dogged by a thin export base and needs foreign currency to meet its import bills, to service foreign debt as well as to pay government expenditures overseas, among others.
Local economic analysts contend that the low foreign exchange reserves position is fuelling the fall of the kwacha against major trading currencies as demand for foreign exchange outstrips the supply.
A Lilongwe-based economist said on Friday that it is likely that foreign exchange position in 2013 will remain precarious as demand for foreign exchange picks up at a time the country is going through a lean period.
“Historically, we [as a country] haven’t generated enough foreign exchange, and in recent times, we have seen that revenue from tobacco, being our main export commodity, has seen been dwindling. Unless tobacco performs well this year coupled with steady inflow of donor resources, forex availability will also be scarce in the formal financial system this year,” warned the economist.
RBM Governor Charles Chuka admitted last week that the central bank’s foreign exchange reserves dropped to $126.5 million (K44 billion) or about 0.7 months of import cover, as at end-November 2012 as a result of continued interventions in the foreign exchange market.
A 2012 Nico Asset Managers Annual Report noted that total forex reserves as at end of 2012 stood at $446 million or 2.37 months worth of import cover from $355 million or 1.89 months worth of Import cover as at end of 2011.
In September last year, RBM revised Malawi’s monthly forex consumption to $188.1 million from $129 million.