The International Monetary Fund (IMF) has placed some fresh scrutiny on the Reserve Bank of Malawi’s (RBM) strategies to promote economic stability and mitigate shocks.
In a recent blog article, IMF analysts Suman Basu, Sonali Das, Olamide Harrison and Erlend Nier urged central banks to intervene in foreign exchange markets when they become illiquid to counteract excessive currency depreciation in unhedged exposures and to manage inflation expectations in conjunction with raising interest rates.
The analysts state that the fund’s Integrated Policy Framework (IPF) recommends using intervention, particularly in liberalised forex markets, during times when markets become illiquid to manage public’s perceptions on inflation.
Reads the blog in part: “In these cases, intervention should not be used to avoid adjusting monetary and fiscal policies.
“And if reserves are scarce, it may be best to preserve them until bigger shocks loom.”
The recommendation comes at a time foreign exchange reserves have hit their lowest point in the past year, with total reserves dropping to $549.85 million (about K961 billion) or about 2.21 months of import cover as of August, according to RBM data.
Speaking in an interview on Sunday, Catholic University of Malawi economics lecturer Derrick Thomo said the country’s exchange rate regime has stabilised the local economy, but stressed that its effectiveness has been limited by forex shortages and low export earnings.
He noted that while Malawi follows some of the IMF’s strategies, especially around liquidity management, there is still room for improvement, particularly in managing currency exposure and inflation expectations.
In a separate interview on Sunday, Scotland-based Malawian economist Velli Nyirongo said a key disadvantage of the current regime, where the price is loosely fixed by the central bank and refined by forex auctions, can distort the true value of the kwacha.
“This leads to imbalances in the market and encouraging a parallel exchange rate system, where forex is traded at higher prices on the black market,” he said.
The current forex shortage, the lowest since December when Malawi’s development partners front-loaded forex, has been widely credited for the delays in the procurement and supply of fertiliser inputs under the Affordable Inputs Programme.
Minister of Agriculture Sam Kawale told journalists last week that government could not distribute the imports on time because international manufacturers want to be paid in advance and in foreign currency.
To mitigate the challenges, Nyirongo urges policy makers to transition to a more liberalised approach that allows the market to “play a greater role in setting the exchange rate”, but cautioned that it would have some side-effects such as the depreciation of the kwacha.
