The country’s foreign exchange reserves continue to shrink, with latest figures from the Reserve Bank of Malawi (RBM) showing a $34 million drop in the reserves in one month.

RBM data shows that gross official reserves, under the direct control of the central bank, dropped to $304.87 million or 1.22 months of import cover in December 2022 from $338.87 million, an equivalent of 1.36 months of import cover in November

RBM headquarters in Lilongwe

During the same period, private sector reserves also slightly dropped to $399.2 million from $400.77 million.

Commenting on the development, Financial Market Dealers Association of Malawi president Leslie Fatch said authorities need to devise ways for sustainable trade balance improvement where focus should be on import substitution, managing consumer appetite for imports, industrialisation and promotion of exports.

He said: “The solutions we are seeking should not be short-term, but medium to long-term as the underlying problems in our economy are structural.

“Much as we want the quick wins, we have to understand that the solutions will not have an immediate impact and we have to manage our expectations on the same.”

Malawi University of Business and Applied Sciences associate professor of economics Betchani Tchereni said in an interview on Tuesday that the depletion of the forex reserves if left unchecked could threaten the health of the economy.

He said: “Such a situation continues to affect production. We are a predominantly importing country which cannot afford to have a depreciating local currency because people will have their welfare eroded.

“We, therefore, encourage investment in productive sectors such as the mega farms, cannabis production and mining as these will bring in the necessary forex in the country.”

Malawi is currently reeling from forex shortages, a situation which is affecting importation of basic and crucial items, according to Malawi Confederation of Chambers of Commerce and Industry.

This comes despite the 25 percent devaluation of the kwacha effected in May last year meant to align the foreign exchange supply to the macroeconomic fundamentals and bring foreign exchange into the formal market.

But analysts say the supply and demand imbalances have been prevalent on the domestic foreign exchange market evidenced by low foreign exchange supply, declining official foreign exchange reserves and widening spread of rates on the market.

In November, the World Bank urged authorities to implement measures that can boost its foreign reserves position by enhancing private financial flows, especially from foreign direct investment and remittances, while gradually reducing aid dependence.

RBM Governor Wilson Banda was quoted as having admitted that the central bank is facing pressure to manage foreign exchange as supply and demand imbalances continue to escalate.

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