The Reserve Bank of Malawi (RBM) has intensified unwinding of its holdings of government securities in line with the RBM Act of 2018.
RBM spokesperson Mbane Ngwira said in an e-mail response on Tuesday that the central bank will no longer be converting ways and means cash advances to government into government securities, an arrangement prohibited under the legislation.
In a Letter of Intent contained in the International Monetary Fund (IMF) Country Report, Minister of Finance, Economic Planning and Development Joseph Mwanamvekha and RBM Governor Dalitso Kabambe have pledged that Malawi is committed to enhancing the mandate of the RBM, including its autonomy and eliminating avenues for monetary financing of government debt.
The two officials have also assured the Bretton Woods institution that they will prohibit the central bank from purchasing government securities on the primary market and limiting credit to government to short-term advances that must be repaid in cash.
Ways and means advances is the temporary loan or overdraft facility provided by the central bank to the government to enable the latter meet any temporary mismatches in the receipts and payments.
The letter further said that RBM’s holdings of government securities has been reduced by 12 percent since end 2017 mainly through sales in the secondary market without any adverse effects on monetary policy implementation and public debt management.
In particular, the IMF report reveals that the RBM’s share of the total stock of Treasury notes fell from 76 to 39 percent between end-December 2017 and end-June 2019.
On the other hand, RBM’s share of Treasury bills (T-bills) during the period under review also fell from 2.6 percent to 0.1 percent.
Ngwira said in line with the legislation, it means the central bank cannot directly lend Treasury money as the law prohibits no further conversion of ways and means advances into T-bills as was the case previously.
He said: “The new Act says no to such conversion and instead government has to go and participate on the market to sell the T-bills to banks and non-bank institutions and clear the over-draft with the Reserve Bank.”
Ngwira said going forward, a strategy to guide future unwinding of RBM holdings of government securities has been developed.
He said the strategy centres around targeting the appropriate level and composition of government securities to be held by the RBM for monetary policy purposes.
As it stands now, all net domestic financing by Treasury will be met by commercial banks and non-banks in the domestic money markets. Currently, under IMF three-year Extended Credit Facility (ECF), government has capped borrowing from the RBM at zero.