Some economic commentators fear political forces could be behind the strengthening of the kwacha to the dollar seen in the last few months.
Last week, Alliance Capital reported that the kwacha held strong to the dollar for another straight week, as it remained unchanged at a mid-rate of K719.36 to the US dollar, a position it has maintained since July.
The commentators consider the development ironic coming at a time when Malawi’s major foreign exchange earner, tobacco, is failing to rake in desired amounts of foreign exchange amid high rejection rates and low prices offered for the leaf at this year’s pro-longed marketing season.
The commentators argue the stability could be influenced by donor support inflow in the system coupled with good output from other export crops such as sugar and tea.
Chancellor College Economic Professor, Ben Kalua, said considering current trends, the kwacha is likely to be managed till next year over what he described as “political-economy” reasons.
“There has been substantial inflow of forex to purchase maize. The aid freeze is not really aid freeze because a substantial chunk of external development assistance is still coming to Malawi. Aid is still coming but not via the budget,” he said.
Kalua said political forces are substantially influencing the foreign exchange market and said he foresees the local unit being stable in the short-term.
“We are not doing well in as far as tobacco is concerned, but we may be doing better in as far as other crops are concerned such as sugar and tea. The performance of the kwacha is influenced by the nature of interventions on the market,” said Kalua.
But the Economics Association of Malawi (Ecama) feels there is a correlation between instability in key fundamentals and the current stability of the local unit.
According to Ecama President, Henry Kachaje, a drop in productivity has in turn also influenced a drop in consumption and demand for imports.
“We are at a state where production has slowed down and there are less imports of raw materials, hence, less pressure in terms of the demand. There is also a slump in consumer demand,” Kachaje said.
Meanwhile, the kwacha was seen devaluing by over eight percent in the first 10 months of 2016, according to the Reserve Bank of Malawi.
This is compared to 22.78 percent depreciation in the corresponding period of 2015.
And in its recent outlook, advisory firm, Nico Asset Managers, predicted that the kwacha will continue depreciating as a result of low inflow of foreign currency in the next few months due to poor tobacco market sales, low inflow investment and persistently high inflation.