The Reserve Bank of Malawi (RBM) change of policy to remove vault cash from the calculation of Liquidity Reserve Requirement (LRR) has raised market liquidity levels, according to the central bank’s latest report.
The RBM in its January 2014 economic review has said the removal of vault cash from the composition of LRR meant that banks had to deposit more funds into their main accounts held with RBM and therefore had an effect of considerably improving the banking system liquidity as measured by the level of excess reserves.
According to the report on average excess reserves increased to K9.3 billion (US$22 572 815.5) per day in January 2014 from K4.1 billion (US$9 951 456) recorded during December 2013.
The RBM in December last year introduced new liquidity measures including a facility for cash-strapped banks and changed the composition of the LRR to contain eminent risks to inflation RBM.
The Monetary Policy Committee (MPC) maintained the LRR at 15.5 percent but decided that vault cash would not count as part of the ratio and that eligible financial institutions will be required to maintain a minimum of 12 percent of the revised requirement.
The RBM explained that the changes were effected because vault cash would not be immediately verified by the central bank.
But recently the IMF noted that inflation fall is being complicated by the expansion of liquidity associated with RBM purchases of foreign exchange.
Inflation slowed to 24 percent in March 2014 according to the National Statistical Office (NSO) and the IMF targets a single digit inflation by end of period this year from 25.1 percent in December’ 2013.
Liquidity levels increased last week increased to average K14.5 billion (US$35 194 174.8) a day from a daily average of K7.7 billion (US$18 689 320.4) in the previous week while borrowing between banks averaged K1 billion per day in the week ending 25 April 2014, decreasing from K3.58 billion (US$8 689 320.4) per day in the previous week.
However, the last IMF warned that the country’s high liquidity levels which is as a result of RBM forex purchases may frustrate inflation fall.