Pressure on forex to persist, says firm

Businesses struggling to access forex

Post was last updated: February 13, 2024

Businesses in the country are still struggling to source foreign exchange from banks, three months after the Reserve Bank of Malawi (RBM) devalued the kwacha by 44 percent.

The devaluation, which was a condition for the Malawi Government to clinch the four-year $175 million (about K297.5 billion) International Monetary Fund (IMF) Extended Credit Facility (ECF) programme, brought the expectation that foreign currency would start flowing into the formal market and reduce depreciation pressure on the kwacha.

However, in its January 2024 Economic and Business Review, Malawi Confederation of Chambers of Commerce and Industry (MCCCI) said the scarcity is despite the stability of the foreign exchange rate.

Reads the review in part: “Despite the stability of the foreign exchange rate, following the devaluation, forex is still scarce, and the difficulties of acquiring raw materials and machinery still persist.”

MCCCI says while the IMF initiative is a stamp of approval for Malawi’s commitment to creating a conducive business environment, and that there is an expectation of increased foreign direct investment following the ECF, this intervention will take time to manifest.

“We, therefore, should expect some of the macroeconomic fundamentals to be unfavourable for an extended period.”

Following the devaluation, the kwacha has remained stable at K1 7000 against the US dollar.

 Already, in January 2024 alone, RBM has conducted two foreign exchange auctions aimed at determining the prevailing market clearing price of the Malawi kwacha against the US dollar and other major currencies.

Based on the results of the auction, the market selling price has been maintained at K1 700.00.

At the same time, the spread between official and parallel market rates has narrowed to about five percent from about 60 percent.

This means that while the official rate is hovering at K1 700 in authorised dealer banks, on the parallel market the dollar is trading at around K1 900.

During the same period last year, the kwacha was trading at K1 034.71 against the US dollar, representing a 64.1 percent depreciation in a year.

However, compared to the same month in 2023, the kwacha has depreciated by a great margin, largely due to the 44 percent devaluation in November 2023.

Market analyst Cosmas Chigwe said in an interview that at the moment, the market is riding on the wave of expectations created by the ECF programme.

“However, if this is not backed by the actual flow of foreign currency, it will eventually fade and we will be back to square one,” he said.

RBM spokesperson Mark Lungu has since conceded that the country is still facing some foreign exchange shortages.

“We acknowledge that the country is still facing challenges on availability of foreign exchange as demand continues to outpace supply,” he said.

In the 2023/24 Mid-Year Budget Review Statement, Minister of Finance and Economic Affairs Simplex Chithyola Banda told Parliament that following the ECF approval, Malawi is expected to receive $240 million (about K408 billion) up to the end of March 2024.

The RBM devalued the kwacha following imbalances and the mismatch in the exchange rate in cash and telegraphic transfer.

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