Despite a notable surge in banking system liquidity, signs of fragility continue to haunt Malawi’s financial markets amid persistent exchange rate pressures and cautious investor sentiment, data from the Reserve Bank of Malawi (RBM) show.
According to the central bank’s Financial Market Developments report for July 25 2025, excess reserves in the banking system stood at K146.15 billion—indicating that commercial banks were holding significantly more than the K560 billion statutory reserve requirement.
On the other hand, net liquidity injections reached K23.78 billion for the week, yet interbank borrowing activity remained strikingly low. On 24 July, only three overnight trades were recorded, with no demand for longer tenors or RBM instruments such as repos or reverse repos.
Scotland-based Malawian economist Velli Nyirongo described the divergence between liquidity levels and subdued interbank trading as a reflection of “fragile risk sentiment and low credit appetite” within the sector.
“Banks prefer to put surplus funds at the central bank rather than extend credit, indicating risk aversion rather than market confidence,” he said.
Economic analyst Brian Kampanje added that the current liquidity build up stems from banks’ continued preference for government securities and consumer loans to salaried employees.
“These forms of lending are safer and more predictable. However, the private sector is not enjoying access to credit because of high interest rates—driven by tight monetary policy aimed at curbing inflation, especially from food costs,” he said.
With the policy rate held at 26 percent and the entire government yield curve—from 91-day Treasury bills to 10-year bonds—unchanged since June 30, investors appear to expect little short-term change in inflation or monetary policy.
Nyirongo said the flat curve signals “muted investor confidence and subdued inflation risk premium,” with markets adopting a wait-and-see approach.
Meanwhile, foreign exchange market developments suggest the kwacha remains under sustained pressure. Daily purchases of foreign currency by authorised dealer banks (ADBs) fell to as low as $2.47 million on 22 July while sales remained elevated earlier in the week.
The mid-market exchange rate breached the K1 750 per US dollar on 24 July, a level Nyirongo said was “not fundamentally secure” without a rebound in forex inflows.
Kampanje noted that the tobacco auction season is offering some relief, with inflows being used to clear critical backlogs on fuel and fertiliser imports.
However, he cautioned that political uncertainty ahead of the 16 September General Election is making holders of Foreign Currency Denominated Accounts hesitant to convert beyond the legal threshold.
“There’s anxiety in the forex market, and unless illegal externalisation is curbed and diaspora remittances are channelled through formal systems, the pressure on the kwacha will persist,” Kampanje said.
He further warned that the government’s growing reliance on domestic borrowing to finance its K2.3 trillion deficit could crowd out the private sector.
“While raising the policy rate is meant to discourage borrowing, the government remains undeterred—rolling over debt and sustaining a cycle of unsustainable sovereign borrowing,” he added.
