The sharp drop in liquidity levels has stunned market analysts who are now grappling to understand the cause or the monetary policy tools that authorities are deploying to manage the sudden swing.
In fact, the economy right now is having a liquidity deficit, which simply means less cash circulating in the system than people are demanding, a stunning turnaround from a kwacha oversupply of K10 billion (about $40m) just three weeks ago.
Data from investment and portfolio managers, Blantyre-based Alliance Capital Limited, released on Wednesday, show a liquidity deficit of K2.7 billion (about $10.8m) from an excess of K10 billion three weeks ago.
There is speculation that the Reserve Bank of Malawi (RBM) maybe taming excess kwacha supply by stemming the demand for foreign exchange but none of the analysts randomly asked on Wednesday seemed to know how the central bank could use forex to achieve these liquidity cuts.
While making borrowing expensive by raising the bank rate from 13 percent to 16 percent three weeks ago could help, analysts do not believe that such a move could have coursed through the financial system so soon to have a dent, especially at a time inflation is swinging double digit gallops and the 49 percent devaluation of the kwacha, on the back of an import cover hovering around one month, has ballooned the number of loitering kwachas chasing few foreign currencies.
Despite these doubts, analysts suggest that the banking industry could be heading for stability in liquidity levels in the near future.
In April this year, the liquidity levels burgeoned, a development analysts attributed to monetary authoritiesâ€™ helplessness to control its upward spiral.
But this week, a money market analyst said that the sudden swing in liquidity levels to a deficit clearly shows that the central bank is mopping up excess liquidity on the market.
“No one is giving a proper answer as to what is happening but, this is surprising. There is no liquidity and this could mean that monetary authorities are stemming demand for foreign exchange.
“This means that the amount of credit for people to buy foreign exchange will be less,” said the analyst, who preferred anonymity until he establishes what instruments the RBM is using to clear excess kwacha.
The levels of liquidity, in other words, money in circulation, has been rising largely due to the shortage of foreign currency in Malawi which has been prevalent for the past two years or so.
“Clearly, liquidity management remains a major challenge in the face of increasing kwacha balances due to unavailability of foreign exchange.
“Meaningful reduction in excess reserves is, perhaps, only achievable upon achieving reasonable inflows of foreign exchange reserves to settle the huge backlog of foreign bills,” explained a money market report in April.
RBM spokesperson Ralph Tseka could not be reached for comment. Business News wanted to find out the monetary policy tools authorities have been using to suddenly curb the rising liquidity levels to the point of being in a deficit.
Coupled with the weakening of the kwacha by 49 percent and its subsequent floatation on May 7 2012, the RBM also took steps to improve the availability of foreign exchange in the market by transferring United States dollars earned at the tobacco auction floors to commercial banks.
The analyst said the move has also helped to reduce liquidity levels because the commercial banksâ€™ customers are now buying foreign exchange; hence, reducing the excess kwacha.
In their weekly commentary, Alliance Capital Limited said the interbank market remained active with the average interbank rate closing at 15.76 percent against a discount window rate of 16 percent.
“Ideally, the discount window rate is meant to be a punitive overnight rate and so the fact that interbank trades are being clinched at a rate almost equal to this rate might signal an impending further adjustment in the general level of interest rates,” according to the commentary.
Discount window accommodation, as of Friday, May 25 2012 was estimated at K3.4 billion, down from K6.8 billion at the close of business the week before.
Malawi has been in a foreign exchange deficit arising from lower export revenues from tobacco, the countryâ€™s main forex earner wiring in 60 percent of earnings, and the lack of budgetary support from donors under the Common Approach to Budget Support (Cabs).
Due to the forex shortage, commercial banks were stuck with kwacha and were unable to provide importers with requisite foreign exchange fuelling liquidity.