The Reserve Bank of Malawi (RBM) has said there is more room for the kwacha to stabilise following fiscal and monetary policy actions currently being implemented.
RBM Governor Charles Chuka said this on Thursday in Blantyre after the fourth Monetary Policy Committee (MPC) meeting of the year that culminated into the reduction of the policy rate or the bank rate from 27 percent to 24 percent.
He said the central bank has done more work not only on the monetary front, but also in ensuring that government borrowing reduces over time.
Said Chuka: “Since the kwacha depreciated sharply last year, we had to take a second look at the instruments we use to manage the kwacha. We have intensified our money market operations.
“People are now holding kwacha balances within the banking system. Normally, people would hide and keep the dollars, putting pressure on the kwacha. Because of this action, interest rates are at a level where people with large balances of cash would rather buy government paper than dollars.” he said.
The governor said the central bank has also been managing the interbank rate—the rate of borrowing between banks—which has since seen it closing at a point better than the previous years.
However, some economists have argued that the introduction of the K2 000 note, which will be released on December 19, is an acceptance by the central bank that the kwacha would continue to depreciate and inflation remaining elevated.
While urging caution, Chuka observed that the factor that is unknown at this time is whether the exchange rate would behave better than it did last year, saying much of it depends on liquidity conditions that may arise in the economy.
Malawi’s main foreign exchange earner, tobacco, has performed poorly this season with revenue lower than last year.
As of Friday, the dollar was selling at as high as K785 in most foreign exchange bureaus, according to RBM daily foreign exchange rate bureau rates report.
However, the kwacha strengthened against the British pound by 2.3 percent and traded at K961.47 at the end the second quarter on account of a weakening pound following diminishing investor confidence as Britain exited the European Union (EU).
Within the region, the kwacha weakened against the rand by 5.4 percent to trade at K48.29 from K45.81 per rand in the preceding quarter.
Malawi Confederation of Chambers of Commerce and Industry (MCCCI) chief executive officer Chancellor Kaferapanjira said the reduction of policy rate is encouraging, but it still remains high and prohibitive for long-term borrowing.
He said in an interview on Friday that although the reduction may stimulate private sector borrowing to some degree, the rate still remains high for businesses that would want to borrow for long-term investment projects.
“The private sector is not borrowing for productive long-term investment purposes anymore at such high existing interest rates and, therefore, it does not make sense keeping the policy rate at 27 percent,” said Kaferapanjira.
However, Bankers Association of Malawi (BAM) executive director Lyness Nkungula said the reduction in the bank rate will encourage more borrowing which would increase economic activity. n