The Reserve Bank of Malawi (RBM) has intensified foreign exchange purchases on the market to limit the continued appreciation of the kwacha, pushing up liquidity levels to around K15 billion (US$35 714).
RBM daily financial market statistics show that last week alone, the central bank injected K3.2 billion (US$7 619) to buy forex from the market; a move an economist argued has the potential to fuel inflation currently at 24 percent, according to the National Statistical Office (NSO).
“Liquidity levels are on the increase and at the same time the RBM is also injecting kwacha into the system. This could trigger a rise in inflation because it means more money in circulation,” said a University of Malawi’s Chancellor College economics professor Ben Kaluwa.
He said RBM’s move could backfire because it has the potential to frustrate efforts by authorities to achieve a single-digit inflation figure by the end of the year.
The International Monetary Fund (IMF) also raised the same fears a couple of weeks ago, arguing that the country’s high liquidity levels could frustrate the fall in inflation.
In a statement after its mission to Malawi for the fifth review under the three-year $156 million (US$371 429) Extended Credit Facility (ECF), the IMF noted the decline in inflation is being complicated by market liquidity expansion.
“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,” said the IMF in a statement.
The fund said the accumulation of reserves will enable 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.
Liquidity levels have in recent times been on the increase and last week, it averaged K14.5 billion (US$34 523 809) a day from a daily average of K7.7 billion (US$18 333 333) the week before, according to RBM figures.
At the same time, borrowing between banks averaged K1 billion (US$2 380 952) per day in the week, down from K3.58 billion (US$852 381) per day the previous week, pushing the interbank borrowing rate down to 8.27 percent from 8.43 percent, an indication that banks have their liquidity levels intact.
But RBM has remained adamant, contending that it will not stop the forex purchases, but will engage in an aggressive tight monetary policy to manage liquidity and inflation. RBM spokesperson Mbane Ngwira earlier told Business News their policy is guided by both smoothening the fluctuation of the kwacha exchange rate and controlling inflation.
He said to ensure that liquidity levels do not affect inflation fall, the central bank will be mopping up excess liquidity by rolling over maturing securities, apart from issuing new securities.
Ngwira said the central bank cannot stop forex purchases to control the kwacha appreciation which he feared could hit K300 if left unchecked.
However, an investment advisory firm, Nico Asset Managers Limited in the March 2014 economic report, warned that the kwacha will depreciate in the medium to long-term largely due to significant imports surpassing exports and uncertainty in budget support.
Malawi is a largely an importing nation and efforts to ensure exports are more than imports have proved difficult over the years.