Banks’ liquidity improves, hits K7bn

Liquidity levels are fast picking up on the market, averaging K7 billion from K5.37 billion the week before, showing that some commercial banks have funds to lend out to customers, according to an analyst.

However, the analyst contend that the usage of the Lombard facility or discount window borrowing, amounting to K1.5 billion at 25.75 percent could also entail that some banks are still facing liquidity hurdles.

“The situation on the market is mixed. Some banks have liquidity while others are still struggling, hence accessing the Lombard facility,” said the analyst.

During the review week, according to Reserve Bank of Malawi (RBM) figures, overnight borrowing between banks averaged K3.29 billion per day, a decrease from K5.04 billion per day the week before.

At the same time, the average rate of interbank borrowing—borrowing between the banks—marginally increased to 14.66 percent from 14.11 percent in the previous week.

The increase in interbank borrowing rate could mean that liquidity issues are still persisting in some banks.

The liquidity levels have been increasing thanks to the RBM foreign exchange purchases to shore up reserves which are hovering at around 2.5 months of import cover, according to RBM figures.

However, the International Monetary Fund (IMF) earlier this year, warned that high liquidity levels have the potential to frustrate the fall of inflation rate.

But the RBM has vowed to continue forex purchases, but said it will engage in an aggressive tight monetary policy to manage liquidity and inflation.

Pressures on inflation—a sustained increase in the general price level of goods and services in an economy over a period of time—softened in May 2014 as headline inflation dropped to 22.6 percent from 23.9 percent in April, largely due to a deceleration in both non-food and food prices, according to the National Statistical Office (NSO).

Based on this trend, the RBM has projected that inflation will settle at 20.5 percent in December 2014.

“Food inflation is expected to continue declining in the near future on account of sufficient food stocks. Furthermore, the projected relative stability in the exchange rate and consistent application of the APM [automatic pricing mechanism] for fuel are expected to augment the favourable outlook for inflation,” said a statement of the 3rd Monetary Policy Committee (MPC) meeting for 2014.

The kwacha is expected to remain stable owing to sufficient build up of official reserves which were recorded at 2.5 months of imports in June 2014. In the medium term, the RBM aims at building official foreign exchange reserves equivalent to at least 3.0 months of imports.

RBM spokesperson Mbane Ngwira earlier said to ensure that liquidity levels do not threaten inflation fall, the central bank will be mopping up excess liquidity by rolling over maturing securities in addition to issuing new securities.

He said that the central bank cannot stop forex purchases to control the kwacha appreciation which he noted could hit K300 if there is no intervention.

Market liquidity has increased over the last few months, hitting K20 billion at one time largely due to RBM forex purchases which is the injection of kwacha injection into the economy.