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International Monetary Fund. African Dept.

authorities have also injected liquidity into the economy by paying domestic arrears accrued by the Roads Fund Administration during FY2012–19. Of the verified bills, half have already been cleared and the other half is expected to be cleared by end-2020. 10. To ease banking system liquidity constraints, the Reserve Bank of Malawi (RBM) recently reduced the Liquidity Reserve Requirement (LRR) on local currency deposits by 125 basis points to 3.75 percent and lowered the Lombard Rate by 50 percent. In addition, the RBM has activated the newly established Emergency

International Monetary Fund. African Dept.
This paper discusses Malawi’s Request for Disbursement Under the Rapid Credit Facility (RCF). The coronavirus disease 2019 pandemic is having a severe impact on Malawi, creating an urgent balance of payments need. The authorities have been proactive in mitigating the impact of the pandemic, including through increased spending on health care and social assistance, supporting small and medium enterprises, bolstering farmers’ incomes and ensuring food security through purchase and storage of agricultural harvests, and easing liquidity constraints in the banking system. The IMF’s emergency financing under the RCF is expected to help the authorities meet the large external financing gap and catalyze further assistance from the international community. Additional concessional donor support will be critical to close the remaining external financing gap and facilitate the needed interventions to ease the economic and social impacts of the pandemic, while preserving Malawi’s hard-earned macroeconomic stability. A widening of the budget deficit is appropriate in the near-term, given the fiscal costs associated with the economic slowdown and critical additional health care and social spending needs, which should be executed transparently and targeted to the most affected parts of society.
International Monetary Fund. African Dept.

have been implemented that require Ministry of Finance vetting and registration of contract sums against available funding before contract signing. Continue implementing the automatic fuel pricing mechanism, where the pass-through of lower international fuel prices will help contain inflation. Introduced measures to ease banking system liquidity constraints. These include the recent reductions in the Liquidity Reserve Requirement (LRR) on local currency deposits by 125 basis points to 3.75 percent (aligning the rates on local and foreign currency LRR) and

International Monetary Fund. African Dept.

Request for Disbursement under the Rapid Credit Facility-Press Release; Staff Report; and Statement by the Executive Director for Malawi

International Monetary Fund. African Dept.

rising non-fuel import costs. With inflation within the RBM’s target band, the RBM maintained its policy rate at 13.5 percent. The banking system remains well capitalized, liquid, and profitable but non-performing loans (NPLs) have risen recently from 4.8 percent at end-June 2019 to 6.6 percent at end-June 2020. Private sector credit growth has been subdued (2 percent in 2020H1) due to low credit demand. To ease banking system liquidity constraints during the pandemic, the RBM has implemented several measures (detailed in IMF Country Report 20/168)—including lowering

International Monetary Fund. African Dept.
Presidential elections in June 2020, a re-run of the canceled 2019 elections, resulted in a change of government, with President Chakwera securing 59 percent of the vote. The new administration is facing a rapid acceleration of COVID-19 cases in Malawi and adverse spillovers from continued deterioration of the global and regional economic situation, significantly worsening the macroeconomic outlook. Consequently, an additional urgent balance of payments need of 2.9 percent of GDP has arisen—bringing the total external financing gap in 2020 to 5.0 percent of GDP. The authorities have requested an additional disbursement of 52.1 percent of quota (SDR 72.31 million) under the “exogenous shock” window of the Rapid Credit Facility (RCF), where 30 percent of the disbursement would finance the government budget. This follows the May 1, 2020 Board approval of a 47.9 percent of quota RCF disbursement (without budget support). The authorities have cancelled the Extended Credit Facility (ECF) and expressed a strong interest in discussing a new ECF—better aligned with their new long-term growth and reform strategy—once conditions permit.