Aid freeze pushes RBM to tighten screws

The Reserve Bank of Malawi (RBM) says it will further tighten further the monetary policy to address challenges due to delayed disbursements by the country’s donors while consolidating gains made since May 2012.

Last week, the Common Approach to Budgetary Support (Cabs) announced the withholding of $150 million (about K60 billion), due to financial mismanagement that has rocked Capital Hill. Earlier, the International Monetary Fund (IMF)also suspended aid over same concerns.

In the wake of decisions by donors, experts and businesses have pointed out that the aid freeze may trigger increased government domestic borrowing, push interest rates up and further worsen the depreciation of the kwacha.

However, in a press release issued on Wednesday and signed by the RBM governor, Charles Chuka, the central bank has said to rein in inflation, it will continue with its tight monetary policy stance through the use of open market operations, bank rate and foreign exchange operations.

RBM has further said in the wake of the developments, it is going to further tighten monetary policy and manage exchange rate adjustment to ensure continued improvements in the availability of foreign exchange in the market while at the same time controlling inflationary pressures.

“The immediate goal of the monetary policy is to continue to build foreign exchange reserves by intensifying the use of existing instruments and to the extent permitted by government fiscal policies. Increased foreign exchange reserves will strengthen the RBM’s capacity to manage the exchange rate movements.

“Thus, given the delay in donor inflows, monetary policy will focus on protecting the country’s official foreign exchange reserves at about two months of imports and build them to about three months of imports by December, 2014,” said Chuka.

The RBM has, however, revised inflation targets to 23.1 percent by end-December 2013, and to 15 percent by end-June 2014 because of the expected increase in food prices and the recent postponement of donor disbursements.

The initial target for end-December 2013 was 14 percent and seven percent for end-December 2014

The RBM adds that its participation in the foreign exchange market will be guided by the need to accumulate and maintain reserves at about two months of import while at the same time endeavouring to minimise large swings in the kwacha exchange rate.

Chuka, however, cautions that the monetary policy will be dictated by fiscal developments—specifically government’s domestic borrowing requirements.