Malawi kwacha sinks to new low

post was last updated: June 18, 2019

By Taonga Sabola:

Pressure is mounting on the country’s trading currency, the kwacha, with Malawians needing over K800 to buy the dollar from around K740 in March.

This is the first time the Malawi kwacha has sunk to a low against the dollar since it was adopted as Malawi’s trading unit.

This is despite the country being in the middle of sales of major foreign exchange earner, tobacco.

According to Reserve Bank of Malawi (RBM) daily foreign exchange rates, the dollar was selling at an average of K805 to the dollar in forex bureau.

Commercial banks were selling the green buck at around K778.

Financial Market Dealers Association (Fimda) President, Patricia Hamisi, said in an interview Monday the currency had considerably depreciated this year due to both demand and supply factors coupled with the current monetary policy and political uncertainty, being an election year.

“This year saw a lot of speculation by the importers due to the uncertainty brought about by elections. You will recall that, in 2012, when leadership changed, the currency was depreciated from K160 per dollar to K350 over night.

“Pre-election this year, people weren’t certain if current policies were going to prevail post-elections. Importers then chose to pay off majority of their bills before elections which significantly increased demand and put pressure on the currency. All this was happening during the country’s lean season which ends with the tobacco season,” Hamisi said.

The Fimda chief said, at the same time, Malawi experienced delays in opening of the tobacco season which saw it commencing end April and not early March as is usually the case and this created a lag between expectations and actuals.

“On top of this, it can be noted that the tobacco proceeds as of last week are lower than 2018 due to both prices being offered and volumes sold (44.8 million kg at $1.40/kg against 78.7 million kg at an average price of $1.59 per kg).

“Banks usually time their foreign exchange commitments to match the peak of the tobacco season and with the unprecedented proceeds realised, the mismatch between demand and supply grew further,” she said.

Hamisi added that the pre-election period is usually characterised by a wait-and-see stance by majority of investors and donors who are another major source of forex, thereby affecting forex supply as well.

“On top of all this, the current Monetary Policy, which is aimed at reducing interest rates, allows access of funds to both individuals and companies leading to an increase in consumer demand in the short-term. Being an importing country, this means increased demand for imports and increased pressure on the foreign currency in the short term.

“Above all this, when we look back to 2018 tobacco season, we never experienced the seasonal appreciation of the currency, it remained stable—meaning demand in the country has been steadily increasing,” she said.

The Fimda chief said the country needed to seriously look at building and diversifying its export base.

She said tobacco, the major forex earner in this economy, brings in an average of $300 million per year while the annual import bill is at $2.5 billion.

“This in itself shows a potential huge imbalance looking at how limited sources of forex the country has. In the short term, if the currency is to see a decreased rate of depreciation, there is need for sustained intervention to ease out demand, coupled with a tight monetary policy by central bank. However, the dilemma is aligning this tight stance with the current low interest rate regime.

“In the long run, the challenge for the economy is to address underlying fundamentals so as to reduce reliance on imports for consumables and thus manage our balance of payments. With the right policy direction, the country should come up with measures to change the country’s economy altogether increase local production for consumables to reduce import demand and increase exports to increase foreign exchange supply,” Hamisi said.

RBM Director of Communication and Protocol, Mbane Ngwira, was not immediately available for comment yesterday.

In its April 2019 economic report, portfolio management advisory firm, Nico Asset Managers, said it expects the kwacha to remain relatively stable against the dollar in the short term due to continued availability of foreign exchange reserves and the reduced demand for foreign currency.

It, however, says in the medium to long term, the kwacha is expected to depreciate due to the significant current account deficits and weak foreign direct investment inflows.

The Economist Intelligence Unit has predicted the pace of annual currency depreciation to increase to over nine percent this year while fiscal consolidation after the elections is expected the downward pressure on the currency in 2020.

“In 2021-22 a weaker US dollar and higher exports aided by a strengthening in the prices of some of Malawi’s agricultural exports should provide further modest support to the kwacha,” Nico says.

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