The Reserve Bank of Malawi’s (RBM) move to re-introduce the mandatory sale of export proceeds improved foreign exchange liquidity, the country’s central bank has said.
Concerned with foreign exchange scarcity, RBM announced the re-introduction of the mandatory sale of export proceeds in August in a bid to ease foreign exchange liquidity challenges.
Under the new provision, exporters are required to sell a minimum of 30 percent of their export proceeds to authorised dealer banks while retaining 70 percent of the proceeds in their foreign currency denominated accounts (FCDAs).
The injection of around $20 million in converted FCDA holdings had an immediate once-off positive impact on liquidity by the end of August, the bank says.
RBM governor Wilson Banda has since said the decision to inject part of the proceeds into the system to provide liquidity is helping the bank achieve its objective and will improve the country’s foreign exchange reserves.
Said Banda in an interview with Business News: “The country has, over the past couple of months, gone through a period where foreign currency has been very scarce. However, when we look at the FCDA holdings, we see substantial amounts which have partly helped in terms of liquidity through this directive.”
According to central bank governor, the directive is going to be reviewed from time to time as the central bank’s ideal arrangement is to have 100 percent retention of export proceeds.
Banda said in the short term, the central bank will engage regional and international banks to provide the country with short liquidity in foreign currency.
Malawi’s gross official reserves have lately been under pressure due to the country’s rising demand for imports, largely because of the Covid-19 pandemic.
The official forex reserves for August 2020 decreased to $604.50 million or 2.42 months of import cover from $642.86 million, an equivalent of 3.08 months of import cover in August 2020.
The situation has in turn continued to strain the exchange rate movement, with the Malawi Kwacha depreciating against all major currencies in the past eight months and slipping to K820.69 against the dollar.
Meanwhile, Financial Market Dealers Association of Malawi notes that although the directive had an immediate impact on liquidity, the biggest factor to appreciate is that the gulf between the market demand and the current supply remains wide.
The association’s president Maclewen Sikwese said the trickle of foreign exchange from the directive is therefore not enough to address the liquidity challenges currently faced.
“The main reason we have not had an immediate huge impact is mainly to do with the composition of the roughly $400 million FCDA holdings sitting with banks at the time of the directive, where nearly 80 percent is non-export proceeds. The majority of the flows sitting in the FCDAs in banks are not affected by the directive hence the muted impact of the directive,” he said.
Sikwese is, however, upbeat that the directive is expected to have a longer lasting impact on the conversions of the incoming export proceeds when this directive is looked at together with the other central bank’s move to reduce the period for repatriation of export proceeds from 180 days to 120 days from the date of exportation.