Government home borrowing ‘affects reference rate’

Bankers Association of Malawi explains tight liquidity

Post was last updated: November 25, 2021

A tight liquidity position persists in the banking sector with excess reserves lately averaging between negative K50 billion and K95 billion, a situation the Bankers Association of Malawi (Bam) attributes to existing disparities between withdrawals and injections.

Responding to a written questionnaire, Bam Chief Executive Officer Lyness Nkungula said there have been more withdrawals of funds from the banking system than injections lately.

“Injections were in the form of Treasury bills and Treasury Note maturities while withdrawals were in form of Open Market Operations, reverse repos, and Treasury bills and Treasury Note auctions,” she said

According to the Reserve Bank of Malawi (RBM) Weekly Financial Market Developments Report for the week ending November 12, daily average commercial bank’s excess reserves before borrowing from the central bank averaged negative K94.5 billion.

Tight liquidity is also used by RBM as a monitory policy stance to stabilise some macroeconomic indicators such as inflation and the performance of the local currency.

The less the money in circulation through tight liquidity, the lower the inflation as demand of goods and services is seen stabilising.

This protects consumers from high cost of living while protecting the local currency from depreciation.

Market analyst Cosmas Chigwe said that although it is a better evil, tight liquidity pushes interest rates in commercial banks up.

In an earlier communication, Bam said, during the last quarter of this year, liquidity level will get tighter.

Most economic fundamentals have been unstable since the Covid pandemic.

In 2020, the economy was a step away from recession as it registered a growth of 0.9 percent.

Justin Mkweu is a fast growing reporter who currently works with Times Group on the business desk.

He is however flexible as he also writes about current affairs and national issues.

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