perks m ligoya : safeguarding malawi ’ s foreign exchange reserves speech by dr perks m ligoya, governor of the reserve bank of malawi, at the official launch of the exchange control manual, blantyre, 29 december 2009. * * * president, bankers ’ association of malawi chief executives of commercial banks distinguished guests ladies and gentlemen compliments of the season. it gives me great pleasure to officially launch the exchange control manual. on behalf of reserve bank of malawi and indeed on my own behalf, i welcome you all to this memorable event. distinguished guests, ladies and gentlemen, the objectives of the official launch of the exchange control manual are three - fold : a ) to present the exchange control manual to its ultimate users - authorized dealer banks and the business community. b ) to assure exporters and importers that the reserve bank of malawi is fully committed to economic liberalization that it embarked upon some fifteen ( 15 ) years ago. c ) to garner support and cooperation of banks and the business community in ensuring prudent use of foreign exchange reserves. in order to achieve these objectives, let me start by mentioning that the main challenge ( and particularly so in recent times ) for malawi as an emerging economy is the generation of sufficient foreign exchange reserves to meet the economy ’ s growing import demand. malawi ’ s foreign exchange reserves are volatile due to the economy ’ s over - reliance on primary commodity exports and in particular a few agriculture exports. this reliance will continue to undermine the country ’ s foreign reserves position unless significant progress is made in growth and diversification of exports. while export diversification on its own may not be a panacea for an improvement in foreign exchange reserves, the principle that export diversification can contribute to reducing instability of export earnings is widely accepted. thus, government in its quest to mitigate malawi ’ s external vulnerability and, more generally, the country ’ s overall economic performance and welfare, continues to take initiatives to promote export diversification. the generation of adequate foreign exchange reserves is key to malawi ’ s growth prospects. apart from supporting the malawi kwacha exchange rate, reserves are also essential in supporting economic growth through imports of industrial raw materials, agricultural inputs, medicines and other basic necessities. government, in this regard, continues to undertake initiatives to boost and preserve the country ’ s foreign exchange reserves. one such initiative is the computerization of export proceeds tracking system. we are all aware that in november 2008, the bank rolled out the

, if we disregard the temporary rise that will occur over the next few months as a result of the rise in oil prices. moreover, the turmoil affecting the international financial markets and the uncertainty with respect to the extent of possible fall - out on the rest of the economy all call for prudence. the risk of a rise in inflation has not been dispelled ; of that there can be no doubt, given the rise in oil prices, the weakness of the swiss franc against the euro, and the high level of capacity utilisation. nevertheless, we do not consider this to be a matter of urgency and view an adjustment in our policy as unnecessary under the current circumstances. it is evident that we will continue to keep a very close watch on developments in the situation. inflation forecast graph i will now turn to the final part of my remarks. what is our inflation forecast? the dashed red curve on the graph represents the new forecast. it relates to the period between the fourth quarter of 2007 and the third quarter of 2010, and maps the future development of inflation on the assumption that the 2. 75 % level remains constant over the forecasting period. for purposes of comparison, the dash - dotted green curve shows the inflation forecast of the september monetary assessment, which was also based on a three - month libor of 2. 75 %. the new forecast indicates that inflation will rise in the first half of 2008. it is likely that it will breach even the 2 % level. however, this increase will be temporary and will be chiefly due to the rise in oil prices. after that time, inflation will settle at around 1. 5 %, with a slight upward trend at the end of the period. the slowdown in the international economy explains the downward revision in the inflation outlook for 2009 and 2010. naturally, any forecast is uncertain, and at present both upside and downside risks are greater than usual. consequently, we will continue to keep a close watch on developments in the financial markets, the international economy, oil prices and the swiss franc exchange rate, in order to assess their impact on the inflation outlook and to be in a position to react swiftly should the need arise. observed inflation december 2007 q1 inflation q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 q1 q2 q3 q4 0. 06 0. 87 0. 91 1. 38 1. 35 1. 06 1. 18 1. 10 1