Rallying kwacha | The Times Group

Post was last updated: December 20, 2017

In February 2012, then Malawi President Bingu wa Mutharika adamantly shot down demands by the International Monetary Fund (IMF), donors and some economists to devaluate the kwacha.

His reasoning was interesting; “Doing that will only worsen poor people’s lives.”

Mutharika, an economist himself, was against the stand the IMF took, indicating that devaluing the local currency would boost exports while taming demand for imports.

He said “…The day we [Malawi] devalue the kwacha; the price of everything will go up.”

At that time, the kwacha was constantly fluctuating against major currencies, trading at K168 against the US dollar in Authorised Dealer Banks (ADB) and inflation was hovering around 12 percent.

Mutharika’s sudden death in April 2012 changed the whole script. Within four weeks of her ascendance to power, Mutharika’s successor, Joyce Banda, devalued the kwacha by 49 percent. Her reason for doing that was to re-establish a cordial relationship with Malawi’s traditional donors and to correct the economy, which, at that time, was suffering from heavy shocks, top of which was shortage of foreign exchange that led the country into a fuel crisis.

The decision saw prices of commodities going over the roof and in the months and years after that Malawi has continued to suffer from inadequate foreign currency, a situation which has kept pressure on the kwacha.

In 2015 alone, the kwacha depreciated by 28.5 percent compared to 14.5 per cent depreciation registered in the preceding year. Within the first eight months of 2016, the kwacha lost value by 7.1 percent.

However, the unit seems to have gained momentum this year owing to signs of recovery and stability of key fundamentals.

Supported by favourable weather conditions and a stable macroeconomic environment, for instance, real Gross Domestic Products growth is projected to rebound to between 4.5 and 5.4 percent in 2017, from 2.7 percent in 2016.

Inflation rate has also been on a downward trend since November 2016 and was recorded at 7.7 percent in November 2017, the lowest point in five years.

Eventually, the Malawi kwacha- US dollar exchange rate has remained broadly stable during the past 12 months, reflecting fiscal discipline, according to the Reserve Bank of Malawi (RBM).

The central bank says its efforts to absorb excess liquidity from the banking system as well as maintenance of positive real interest rates has seen the unit remaining stable this far.

RBM spokesperson, Mbane Ngwira, said this is the first time in a while the kwacha has been allowed to find its international value and augers well with continued decline in inflation.

“Exchange rate outlook this year is far much better than last year. RBM is, therefore, confident that, in 2017 and at least into the foreseeable future, Malawi is not likely to experience the usual seasonal lean period in terms of foreign exchange availability, thereby cementing the current stability of the exchange rate,” Ngwira said.

Presently, demand for foreign exchange in the market has been matched by supply.

Although the tobacco market performed dismally with earnings being lower than last year, foreign currency reserves have remained within the required equivalent of three month of imports.

Ngwira said this shows that the economy has successfully developed resilience and is now not just relying on tobacco to boost foreign currency reserves.

“This is a clear indication that the share or importance of tobacco as a foreign exchange earner is being overtaken by other imports.

“This is good for the economy because any shocks resulting from lower tobacco proceeds is being absorbed with little or no impact on the foreign exchange markets,” he said.

Some economic think-tanks and commentators have also projected continued stability of the local unit to the end of 2017, albeit with cautious optimism as they are indicating that depreciation may occur thereafter.

After a significant depreciation between 2013 and 2016, the kwacha has been stabilising for the greater part of this year with tight monetary conditions mitigating the impact of a wide current account deficit.

In its recently published country report for Malawi, the Economic Intelligence Unit (EIU) says it expects the currency to remain fairly stable, albeit depreciating slowly, “…as tobacco related dollars dry up towards the end of the year.”

The pace of depreciation is forecast to accelerate between 2018 and 2019, amid volatility in global currency markets.

“A weaker dollar and firmer growth in Malawi will support the kwacha in 2020-21,” the EIU said.

African Alliance Malawi Limited Chief Executive Officer, Armstrong Kamphoni, said the kwacha has remained resilient, defying seasonality odds.

He said it is likely that there would be sustained stability of the exchange rate in the short to medium terms.

According to Kamphoni, unless the country is hit by exogenous shocks like rising international fuel prices, the unit will remain stable.

“With forecasts pointing to a normal rainy season and the relation between government and the international community remaining amicable; we should still expect the currency to remain stable,” Kamphoni said.

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