RBM forex reserves target speculative, says economist

University of Malawi’s Chancellor College economics professor Ben Kaluwa has doubted Reserve Bank of Malawi (RBM) ability to build official gross reserves to three months of import cover, arguing the target set in July was only speculative.

During the recent Monetary Policy Committee (MPC) meeting held in July, it was noted that in the medium-term, RBM aims at building official foreign exchange reserves of at least three months.

However, recent figures from RBM show that gross official reserves increased to $484 million, an equivalent of 2.53 months import cover on July 25, far below the set target.

But Kaluwa told Business Review on Tuesday that the target was only speculative and may not be achieved.

“It is difficult for RBM to achieve the target and build such gross reserves. The target was only speculative because RBM does not earn forex. It is only a regulator and provides a service,” he said.

RBM spokesperson Mbane Ngwira could not be reached for comment on Tuesday on how the central bank would achieve the target.

Due to the ongoing sales of tobacco, the country’s major forex earner, the central bank has been building international reserves by purchasing forex from the market to smoothen the seasonal volatility in the exchange rate while, creating a buffer for the lean season.

The International Monetary Fund (IMF) welcomed the move by RBM and its plans to further boost the level of reserves during this year’s tobacco season to provide the economy with a buffer against exogenous shocks.

However, the IMF cautioned the central bank against the country’s high liquidity levels which is as a result of the RBM forex purchases, noting this could potentially frustrate the fall of inflation currently at 22.5 percent as of June 2014, according to the National Statistical Office (NSO).

But as the tobacco marketing season draws to an end while import cover is still around 2.5 months, analysts doubt the central bank will achieve the target.

The Tobacco Control Commission (TCC) has set August 29 as the closing date for this year’s tobacco marketing season.

Apart from tobacco, Malawi also relies on forex from donors, but it is still not clear how much, if any, funds will be disbursed by the country’s partners.

Against this background, Nico Asset Managers, a local investment advisory firm, in its July 2014 economic report noted that overall, the kwacha will appreciate in the short-term.

But said in the medium to long terms, the local unit will depreciate due to trade imbalances, current account deficits and significant levels of imports.