Malawi foreign exchange reserves drop by 10%

Malawi gross official foreign exchange reserves dropped by about 10 percent to 2.4 months import cover on August 20, from 2.6 import cover on July 12, Reserve Bank of Malawi (RBM) reports indicate.

The RBM daily financial reports show that the official reserves stood at $444 million which is an equivalent of 2.4 months import cover on August 20 down from $490 million, an equivalent of 2.6 months import cover on July 12.

Private sector reserves have, however, slightly increased from $290 million to $296 million within the same period.

A further analysis of the RBM data shows that the central bank has been buying foreign exchange from commercial banks since the onset of the tobacco marketing season, but RBM sold foreign exchange to commercial banks totalling about K6.25 billion between August 14 and August 26, causing the decline in the reserves.

Commenting on the foreign exchange sales, RBM spokesperson Mbane Ngwira in a telephone interview on Tuesday said the transactions were for the country’s fuel requirements.

“The transactions were for the supply of fuel and not to support the kwacha. Although we are heading into a lean period, the central bank may not just intervene through sale of foreign exchange to support the kwacha. The RBM will look at a number of factors including liquidity levels, because such sales may filter into liquidity problems and high interest rates,” said Ngwira.

He added that currently the market is able to meet foreign exchange demand and supply but RBM is monitoring the system.

RBM Governor Charles Chuka commenting on the stability of the kwacha was quoted in Weekend Nation as saying the central bank will ensure that the economy does not go back to the kind of fluctuation that we saw last year.

Chuka argued that monetary authorities have proved that when the kwacha is determined by market forces, foreign exchange is available and that it will continue being available in the times to come.

However, last year in May, after the 49 percent devaluation of the kwacha and its subsequent flotation, the local unit dropped by over 150 percent and official reserves dropped to below one month import cover due to demand of foreign exchange.

Due to tight monetary control and the tobacco sales which have fetched over $350 million, the kwacha stabilised before starting to gradually depreciate.