The Financial Market Dealers Association of Malawi (Fimda) says it sees continued pressure on the kwacha as we head into 2016.
In a response to The Daily Times questionnaire on Thursday, Fimda President Alfred Nhlema said the currency fluctuations the kwacha has experienced in recent months are normal in a market that is still trying to discover itself.
The kwacha lost considerable ground in the last month of 2015 to hit as low as K680 to the dollar from around K430 to the green buck at mid-year.
Nhlema said the dollar-kwacha value is still tending towards its long run path and is yet to naturally settle at its equilibrium state given the huge demand-supply bottlenecks a economy is experiencing.
“The currency will continue to be subjected to up and down movements in the coming year but the general direction will be northwards,” said Nhlema.
The Fimda chief said the strengthening of the US Dollar during 2015 year has not spared other regional currencies such as the South African Rand, Zambian Kwacha and the Kenyan Shilling.
According to Nhlema, the Rand was trading just above ZAR11.50 against the dollar in January 2015 and has depreciated to levels above ZAR15.50 per dollar of late.
He further said the Zambian Kwacha has depreciated from levels just above ZMWK6.5 against the dollar recorded in January 2015 to levels above ZMW10.90 in December 2015 while the KES has depreciated f rom levels jus t above KES91.00 registered in January to levels above KES102.00 per dollar.
“It should also be noted that the year 2015 was characterized by a lot of other challenges, among them moderate tobacco production due to flooding and lack of budgetary support which led to demand outweighing supply for most part of the year.
“These demand-supply mismatches have normally heightened speculative tendencies in a market where shortages have been frequent over the past decade,” said Nhlema.
He noted that studies have shown that speculative activity in the foreign exchange markets is heightened by a rise in the number of speculators, increased risk taking on the part of speculators and declining cost of the act of speculation.
“These factors potentially increase the extent to which the exchange rate will appear to respond more to non-market fundamentals other than market fundamentals themselves. This case is very familiar to our situation,” said Nhlema.
On what needs to be done to achieve currency stability, Nhlema pointed out the need for long-lasting interventions such as deliberate policy to promote production of import-substituting commodities, safeguarding the exportation of our commodities through established channels like commodity exchanges where the price discovery mechanism is transparent and radical promotion of the tourism sector.
“Diversification into mining and extraction of minerals should also be speeded up so that Malawians can start to benefit from its mother nature. In the short-term, the Central Bank could intervene in the market to ease the current pressure given availability of resources,” said Nhlema.
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