The Reserve Bank of Malawi (RBM) has said it is banking on the sufficiency of the reserves and tight liquidity in the foreign exchange market for the stability of the exchange rate in the short-run.
Recently published RBM figures indicate that the kwacha marginally lost value against most of its trading counterparts during the period June to August 2018 compared to the end-June 2018 with kwacha slightly depreciating against the United States dollar and the Euro but appreciated against the pound sterling and the South African rand.
As of Wednesday, the kwacha was trading at K735 to the green buck in most authorised dealer banks.
The banking system liquidity conditions on the other hand were relatively loose during the quarter compared to the preceding quarter with the un-borrowed excess reserves steady at between July and August 2018 at an average of K3.2 billion per day from an average of negative K0.7 billion per day in June 2018.
At $753.6 million (3.6 months of imports) in August 2018, gross official reserves were higher than $655.08 million in a similar period in 2017.
As at September 10 2018, private sector reserves stood at $325.5 million with foreign currency denominated account (FCDA) balances amounting to $339.3 million while authorised dealer banks’ (ADBs) held negative $13.8 million.
For the past 12 months, the kwacha largely remained stable against major foreign currencies due to what authorities say is fiscal discipline and efforts by the RBM to absorb excess liquidity from the banking system as well as maintenance of positive real interest rates.
According to the central bank, this is the longest period the kwacha has been allowed to find its international value in line with market forces of demand and supply.
RBM spokesperson Mbane Ngwira said on Wednesday the central bank is targeting six months of imports in the medium-term with inflation rate at five percent, which could change the dynamics.
Earlier, Ngwira noted that the country’s reserves have, on the other hand, been above three months of import cover largely due to earnings from other export commodities such as sugar, tea, coffee and pulses.
This situation does not only support foreign exchange build up, but also helps to consolidate confidence of the private sector to invest for growth.
“For a while now, the central bank has observed that demand for foreign exchange in the market has been matched by supply and that the market is able to clear. The disbursement of budget support, therefore, comes at the right time,” he said.
Analysts think a healthy reserves position is good for the economy because any shock resulting from lower tobacco proceeds is being absorbed with little or no impact on the foreign exchange markets, an indication that the economy has developed resilience.
Economic analyst, Cosmas Chigwe, said looking at the past two years, tobacco has had little impact on the exchange.
The kwacha depreciated by five percent during the lean season last year, and the analyst said, the central bank’s efforts are helping to prop up the currency.
Traditionally, tobacco has been known to contribute 60 percent of foreign exchange earnings, but that seems not to be the case now.