RBM to maintain falling inflation, kwacha stability

The Reserve Bank of Malawi (RBM) has vowed to continue with the tight monetary policy to maintain the trajectory taken by inflation and the kwacha over the past 12 months.

In an interview on Friday in Mangochi, RBM Governor Dalitso Kabambe said what is critical now is to grow the economy and grow it fast. RBM has projected a real gross domestic product growth (GDP) growth rate of about five percent this year, which the governor said is attainable. 

“This is one of the longest periods of kwacha stability in recent history. With inflation going down, interest rates have also been falling and growth is rebounding,” said Kabambe on the sidelines of the Insurance Institute of Malawi (IIM) annual conference.

Malawi’s year-on-year inflation rate for July is at a six-year low of 10.2 percent, a few percentage points shy of the single digit, which the central bank has planned to achieve by December this year.

Due to the falling inflation, the RBM cut the policy rate from 22 percent to 18 percent in July, a development that compelled commercial banks to peg their base lending rates at around 27 percent.

The import cover—an important indicator of the stability of the currency which measures the number of months of imports that can be covered with foreign exchange reserves—has been above three months.

As of Friday last week, figures from the RBM showed that foreign exchange reserves are at $1.04 billion (K762 billion), or 3.3 months of import cover.

This comprises $693.4 million (K508 billion) official reserves, held by the RBM to anchor the local unit, and $350.9 million (K257 billion) private sector reserves, which consists of money in authorised dealer banks (ADBs) and foreign currency denominated accounts (FCDAs).

Kabambe forecasts the kwacha to be stable more so with the disbursement of $80 million (K59 billion) World Bank budget support and continued exports of the commodities such as tea and sugar, pulses and legumes.

This year’s earnings from tobacco have dropped by 23 percent to $212 million (K155 billion) from last year’s $275 million (K201 billion) largely due to reduced output.

But this is not a cause for concern for the RBM, according to Kabambe.

“We appear to be exporting more not just tobacco. For instance, last year we exported pulses [edible seeds of plants in the legumes family] in excess of $100 million [K73 billion]. The other foreign exchange is coming from tea, sugar, groundnuts and other legumes.

“The way we project ourselves at Reserve Bank, we will continue to have an import cover of above three months, we will continue to have a stability in the kwacha,” he said.

Economics professor at University of Malawi’s Chancellor College, Ben Kaluwa, believes with the continued tight monetary policy and subdued maize prices, inflation will continue falling with the kwacha remaining stable.

“The RBM need not waiver on its tight monetary policy stance to maintain the path inflation and exchange has taken,” he said in an interview.

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