Identifier
Created
Classification
Origin
04LILONGWE842
2004-08-30 10:45:00
CONFIDENTIAL
Embassy Lilongwe
Cable title:  

MALAWI'S CENTRAL BANK FIGHTS TO MAINTAIN KWACHA

Tags:  EFIN ECON MI 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
C O N F I D E N T I A L SECTION 01 OF 02 LILONGWE 000842 

SIPDIS

STATE FOR AF/S TED CRAIG
STATE FOR EB/IFD/OMA FRANCES CHISHOLM
STATE FOR EB/IFD/ODF MARLENE BREEN
TREASURY FOR INTERNATIONAL AFFAIRS / AFRICA LUKAS KOHLER

E.O. 12958: DECL: 08/26/2014
TAGS: EFIN ECON MI
SUBJECT: MALAWI'S CENTRAL BANK FIGHTS TO MAINTAIN KWACHA


Classified By: Econoff William R. Taliaferro for reasons 1.5 b and d

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SUMMARY
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C O N F I D E N T I A L SECTION 01 OF 02 LILONGWE 000842

SIPDIS

STATE FOR AF/S TED CRAIG
STATE FOR EB/IFD/OMA FRANCES CHISHOLM
STATE FOR EB/IFD/ODF MARLENE BREEN
TREASURY FOR INTERNATIONAL AFFAIRS / AFRICA LUKAS KOHLER

E.O. 12958: DECL: 08/26/2014
TAGS: EFIN ECON MI
SUBJECT: MALAWI'S CENTRAL BANK FIGHTS TO MAINTAIN KWACHA


Classified By: Econoff William R. Taliaferro for reasons 1.5 b and d

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SUMMARY
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1. (U) With the Malawian kwacha under increasing pressure,
the Reserve Bank of Malawi (RBM) has so far managed to
maintain its value by using a combination of methods,
conventional and otherwise. A small, heavily invested market
with few speculative options has helped them up to now. In
the long run, RBM's tricks cannot substitute for a solid
fiscal policy. End summary.


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CONVENTIONAL TOOLS: MORAL SUASION AND CAPITAL CONTROLS
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2. (U) The Reserve Bank of Malawi describes its efforts to
maintain the kwacha's value as a combination of intervention
in the market and "moral suasion," made the more effective by
a lack of attractive investment alternatives to treasury
bills. This seems to be borne out by the continuance of
fully subscribed T-bill auctions despite sharply lower
interest rates and a higher volume of issuances over the past
several months (though real rates, at about 15 percent, are
still high). Given most financial institutions' already
heavy stake in government paper, there is some incentive to
keep buying simply in the fact that new issuances are largely
financing current maturities. Senior executives at the bank
acknowledge that traditional tools, including higher
liquidity reserve requirements (currently 27.5 percent) and a
controlled capital account, are helping to keep speculative
pressures down despite high liquidity and low foreign
exchange reserves (1.5 months, against a normal seasonal
reserve of 2.5 to 3 months).


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NOT-SO-MORAL SUASION WORKS, TOO
--------------


3. (C) Outside the bank, we have heard that the RBM is using
other, less ethical tools as well. The state-controlled
tobacco auction is the main source of dollars in the economy.
The bank has said that it is buying dollars from the auction
floor to ensure timely transaction times and a consistent
exchange rate, and is benefitting more or less incidentally
from controlling the dollars. According to a senior
executive at the National Bank of Malawi, RBM is requiring
the auctioneer to clear all dollar sales through the RBM,
except for those deposited directly to dollar denominated
accounts. This gives RBM a monopoly on about half of the
dollars flowing through the floor, to the (possibly illegal)
exclusion of commercial banks.


4. (C) The other instrument takes more direct aim at
controlling speculation in the commercial banks. According
to a discount house executive, the RBM has threatened not to
sell currency to banks if they do not observe an unofficial
floor on the kwacha's value against the dollar (currently
said to be MK110/dollar). This measure has allegedly been
used in the past on Stanbic Bank, at a measurable cost in
market share.


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COMMENT: IN THE LONG RUN, IT'S ABOUT RESPONSIBILITY
-------------- --------------


5. (C) Nearly every informed observer of the kwacha
characterizes its position as precarious. The RBM has
succeeded up to now in defending its currency, despite thin
reserves and, until June, increasingly inflationary spending
by government. The bank is quick to say the market here is
so small that normal market dynamics (according to which a
lowering of rates would lessen demand) do not apply. This is
their logic for arguing against the IMF's demands for higher
bank rates: since rate changes seem not to affect demand for
government paper, the GOM should pay as little as the market
will bear. To the extent that RBM can squelch other
investment opportunities, and they evidently can, the
situation will probably stay contained for the time being.
In the longer run, though, the bank's machinations have to be
backed by a responsible fiscal policy. So far, the Mutharika
government appears to be cognizant of the danger and
determined to avoid it.

RASPOLIC