Site icon The Times Group Malawi

Malawi needs 3.9 months import cover – IMF

SCARCE—Foreign currency denominations

Sosten Gwengwe

The International Monetary Fund (IMF) has said the reserve adequacy model for credit-constrained economies suggests that the level of foreign reserves considered adequate to withstand external shocks for Malawi is around 3.9 months of imports.

The observation by the Bretton Woods institution comes at a time Malawi has been facing one of the most acute shortages of forex, with official reserves seen at 1.36 months in November.

In its External Sector Assessment, which is part of the November 2022 Staff Appraisal, the IMF says given a very low level of gross reserves currently and unsustainably high debt levels, staff’s view is that it would take time to increase gross reserves to 3.9 months of imports.

“Still, staff recommends accumulating gross reserves to about 3.7 months of imports within a few years would be necessary, considering several country specific factors such as large import dependency and vulnerability to climate events,” the assessment reads.

According to the IMF, Malawi’s gross reserves continued to decline and went down to below $80 million at the end of 2021.

This, according to the IMF, was equivalent to only 0.3 months of imports.

“SDR allocations, about $190 million, of August in 2021 was converted to United States dollars immediately and used for repayment obligations within months. To help increase foreign currency liquidity in the market, the Reserve Bank of Malawi reintroduced a 30 percent of surrender requirement for proceeds from exports in August 2021, which has been further tightened in March 2022 so that all exporters have to surrender.

“Staff sees that the measure has not been successful to replenish foreign currency in the market. The main source of declining gross reserves come from large principal and interest repayments obligations to non-concessional external loans and rolling over ST swaps,” the fund says.

In a November 11 2022 Memorandum of Economic and Financial Policies to the fund, Finance Minister Sosten Gwengwe and Reserve Bank of Malawi (RBM) Governor Wilson Banda admitted that gross official reserves are low and pressure on the exchange rate is high.

Gwengwe and Banda committed to implement agreed paths towards accumulating foreign exchange reserves with the view of rebuilding the country’s reserve assets.

“We will slow down direct foreign exchange sales to the market in support of imports. In any event, the RBM will become a net purchaser of foreign exchange. Concurrently, we will gradually wind down the existing swap open position as guided by the foreign exchange accumulation path.

“We believe that pursuing this reserve accumulation strategy will help achieve a three-months import cover by the end of the medium term. Moreover, we will also monitor reserve liabilities so that the RBM’s net international reserves (NIR) will reach an adequate level as quickly as possible,” the authorities committed.

They further committed to facilitate the price formation processes in the market by arranging small pilot foreign exchange auctions. This, according to the authorities, would help determine the market-clearing exchange rate and facilitate development of the interbank forex market.

Facebook Notice for EU! You need to login to view and post FB Comments!
Exit mobile version