Monetary authorities will soon succumb to market pressure and adjust upwards the bank rate currently at 16 percent in view of the tight liquidity position, according to investment and portfolio managers Alliance Capital Limited.
Over the past month, there has been a critical shortage of kwacha in commercial banks, a situation blamed on the recent 49 percent devaluation of the local currency which put pressure on banks to raise enough kwacha to start clearing the import backlog.
Market insiders say because applicants of foreign currency only do so with enough local currency locked in their accounts, most banks lent out the idle funds that were awaiting forex. When the shock devaluation came and forex was available, banks could not mobilise enough kwacha with which to exchange. That explains the cash squeeze in the financial system.
The Reserve Bank of Malawi (RBM) has since responded by introducing a discount window borrowing at 18.5 percent for â€œstressed banksâ€ to access and avert a liquidity crunchâ€”a time when cash resources are in short supply and demand is high.
The tight market liquidity has forced banks to adjust their interest rates as a coping mechanism with average base rates rising to 23.5 percent from 17.5 percent in the face of an unchanged bank rate of 16 percent, at a time when inflation has shot to 17.3 percent in May.
But in their weekly commentary, Alliance Capital Limited observed that market liquidity remained low during the week and closed with a negative K710 million as at June 29.
This situation pushed the weighted average interbank rate to 17.48 percent against a bank rate of 16 percent.
â€œThe discount window facility at RBM was heavily utilised during the week with an average daily accommodation of K21.2 billion against interbank average lending of K2.8 billion. The discount window recorded an average transaction rate of 17.87 percent,â€ read the commentary.
â€œThis is probably the first time in recent memory where we have seen such movements emanating from the banks and, perhaps, reinforces the principle of a liberalised economy,â€ added the firm.
The investment and portfolio managers have hailed the RBMâ€™s handling of the situation, calling it â€˜creativeâ€™, by refusing to raise the bank rate while introducing a new, uncollateralised discount window facility that attracts a much higher rate than the â€œnormalâ€ rate.
But the firm said this is just â€˜windowdressingâ€™Â and expects the authorities to let go and adjust the bank rate the soonest.
â€œThe liquidity position is expected to remain tight as the central bank continues to intervene through foreign exchange sales,â€ noted the market report.
In an earlier interview, RBM spokesperson Ralph Tseka explained that after the kwacha devaluation, commercial banks started clearing some backlog of external payments by most importers which resulted in wiping out excess liquidity in the financial market.
As a result, some banks started flocking to RBM for assistance which prompted the central bank to introduce a non-collateralised window.
â€œThe banks were, therefore, squeezed of the kwacha and started to come to us,â€ said Tseka, stressing that the central bank is closely monitoring the performance of the banks to ensure that no bank fails in Malawi.
Despite the tight liquidity levels, the Treasury Bills (TBs) auction was oversubscribed by K2.69 billion against an announced amount of K976 million, with the majority of applications on the 182-day paper.
Given inflation of 17.3 percent as at May, investors are still getting a raw deal as the obtaining yields on 91 days and 182 days tenor are hovering at between 15 percent and 16.20 percent.