Tight monetary policy which the Reserve Bank of Malawi (RBM) has been implementing has helped to prop up the country’s import cover above the internationally recommended three months, which is regarded as the rule of thumb.
RBM spokesperson Mbane Ngwira said on Friday the central bank has been building reserves and to achieve the feat, it has set its target to have excess liquidity at zero as this is what brings about demand for foreign exchange.
RBM daily financial market report for the week ending June 23 2017 shows that gross official reserves, kept by the central bank to maintain the stability of the kwacha, peaked at about $639.87 million (K469 billion) or 3.06 months of imports.
At the same time, private sector reserves, which are a combination of reserves in foreign currency denominated accounts (FCDAs) and authorised dealer banks (ADBs), were recorded at $363.50 million (about K266 billion) or 1.74 months of import.
Cumulatively, the reserves were recorded at $994.37 million (K728 billion) or 4.80 months of import cover, which is enough to sustain importation of strategic imports such as fuel and medicines.
Last week, the International Monetary Fund (IMF) approved disbursement of $26.9 million (about K19 billion) at the end of the ninth review of the country’s Extended Credit Facility (ECF), which will boost foreign exchange reserves and maintain them at above three months of import cover and help to keep the kwacha stable in the coming months.
Ngwira said the foreign exchange injection from IMF will increase the gross official reserves position to about four months by July this year.
In its fifth monetary policy statement released last week, RBM said it will continue to aim for a minimum of three months import cover in foreign exchange reserves.
Economic commentators have backed the central bank’s efforts to retain the economy by putting in place sound structural reforms to anchor the reserves.
In an interview, a Blantyre-based economic analyst said the current economic underpinnings and government dealings may lead to an increase in reserves which is might also lead to a strong kwacha, which critical to the reduction of inflation rate.
He said: “With the resumption of budgetary support, we envisage the country doing well in terms of import cover. World Bank is also balancing its lending approaches as its traditional market has become competitive with countries now fast looking East for infrastructure funding that has less stringent rules.”
Presenting the 2017/18 National Budget in May this year, Minister of Finance, Economic Planning and Development Goodall Gondwe was positive that the import cover will likely be above three months by the end of the fiscal year propelled by direct budget support from the World Bank, European Union and the expected disbursements from the IMF and export proceeds.
Despite the economy being on the tailspin over the past two years, import cover has largely been maintained at above three months, a situation that has kept the local currency stable. n