Navigating the Upswing: Capitalizing on Malawi Kwacha’s Shifting Dynamics

Key Business Points

• The Malawi kwacha has weakened against the euro, pound, and South African rand, but remains relatively stable against the US dollar, raising concerns about the local unit’s stability.
• Foreign exchange scarcity continues to be a challenge, with reserves hovering below two months of import cover, exposing the economy to external shocks.
• Economic analysts warn that the currency market could remain volatile as long as foreign exchange supply remains constrained, underscoring the need for export diversification and fiscal resilience.

The Malawi kwacha has come under renewed pressure, weakening against major currencies such as the euro, pound, and South African rand. However, it has remained relatively stable against the US dollar, a critical currency for Malawi’s trade. According to the Reserve Bank of Malawi (RBM), the kwacha depreciated by 2% against the euro, 1.4% against the pound, and 2% against the rand. This development raises fresh concerns about the local unit’s stability, particularly given the scarcity of foreign exchange in the country.

Foreign exchange reserves are currently hovering at below two months of import cover, way below the recommended three months’ threshold. This exposes the economy to external shocks, making it essential for businesses and entrepreneurs to diversify their exports and strengthen fiscal resilience. The RBM report attributed the kwacha’s stability against the dollar to the US government shutdown, which has seen the dollar weakening against other currencies.

Economic analysts, including Financial Market Dealers Association president Leslie Fatch, agree that the movement of the local unit against other currencies is a function of how those respective currencies are trading against the dollar. The International Monetary Fund (IMF) has also observed that the kwacha’s official exchange rate is overvalued, creating distortions across the real economy. This has led to elevated activity in the parallel foreign exchange market, with a growing spread to the official rate.

In Chichewa, this phenomenon is referred to as "kung’ondola kwa kwacha", highlighting the need for businesses to be aware of the "zinthu zili mwamsanga" (things that are happening in the market). Economic consultant Booker Matemvu cautioned that the currency market could remain volatile as long as foreign exchange supply remains constrained, underscoring the need for Malawi to strengthen its fiscal resilience.

The Mid-Year Economic Review by Nico Asset Managers Limited noted that persistent shortages of foreign exchange and speculative pressures continue to cause the disparity between official and parallel exchange rates to widen. The report emphasized that much of the country’s foreign currency inflows were used to settle overdue payments for essential imports, leaving the country with low reserves. As a result, businesses and entrepreneurs must be "wachitidza" (vigilant) and "wakukondwa" (cautious) in their financial planning, taking into account the "kunyuma kwa kwacha" (depreciation of the kwacha) and its potential impact on their operations.

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