World bank cautions on forex shortage

World bank cautions on forex shortage

Post was last updated: March 29, 2023

The World Bank says Malawi needs to urgently address the prevailing foreign exchange crisis, warning that prolonged forex shortage could impede business and economic growth.

In its published overview on the country’s economy, the Bretton Woods institution has warned that acute shortage of forex is impeding businesses as reflected in the increasing shortage of imported goods, including essential medicines and petroleum products.

Reads the economic overview in part: “The Reserve Bank of Malawi [RBM] devalued the Malawi kwacha against the US dollar by 25 percent in May 2022, but the spread between the official rate and less strictly controlled rates on cash purchases at foreign exchange bureaus at times has exceeded 50 percent as of end of February 2023, surpassing the pre-devaluation level.”

The bank further said the official forex reserves continue to be low, declining further from their gross position of 0.5 months of import cover at the end of 2022.

Speaking in an interview on Monday, market analyst Cosmas Chigwe said the spread between the official and parallel market rates is critical as it is one of the largest indicators of an economy’s health and stability of the currency.

He said: “A wide margin indicates that the central bank of the country is not in control of the foreign exchange market.

“It usually leads to a flight of transactions and capital from the formal market to the parallel market as there is an opportunity for arbitrage and those who earn forex would prefer to sell it outside the system as it fetches more.”

Chigwe said improving the foreign exchange availability is a long-term thing that has to be trade-driven.

He, however, observed that the demand for raw commodities is inelastic and is completely controlled by buyers and it is “something that we need attempt to change when negotiating trade terms”.

Chamber for Small and Medium Businesses Association executive secretary James Chiutsi said it has been tough for small and medium enterprises to navigate forex issues due to high prices of the hard cash on the parallel market and delays to access the same from banks.

He said: “In the banks, you have to apply and be put on the waiting list. In this case, there are delays in importation of necessary and important products, including raw products for manufacturing; all these are making business difficult for SMEs.

“Business operations are almost grinding to a halt, especially for those involved in import and export business. We would have thought that the sector would be booming, but what is happening is to the contrary.”

Malawi Confederation of Chambers of Commerce and Industry president Lekani Katandula said on Monday that forex shortage in formal markets is causing regular shortages of critical input for production, making it a tough operating environment.

To boost the foreign exchange reserves, RBM implemented a surrender requirement of 30 percent of exports and, in May 2022, devalued the kwacha by 25 percent.

In the 2023/24 Budget Statement, Minister of Finance and Economic Affairs Sosten Gwengwe said Treasury expects gross official reserves to recover to above three months over the medium term.

Following the foreign exchange shortages, consumers are being forced to pay premiums of over K500 per dollar on the black market while the official exchange rate hovers around K1 036.

Malawi Government data shows that trade deficit went down from $2.07 billion in 2021 to $564.41 million in 2022, the reduction of which was driven by a sharp drop in imports caused by the scarcity of foreign exchange, resulting in a protracted balance of payment problem.

During the year under review, the importation of pharmaceuticals fell by 80 percent while that of fertiliser and diesel fell by over 30 percent, resulting in supply shortages.

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