The November 2023 devaluation of the Kwacha by 44 percent is yet to translate into significant supply of foreign currency on the local market, the World Bank has said.
In its bi-annual publication, the Malawi Economic Monitor (Mem), issued last week, the Bretton Woods’ institution says there is continued spread and uncertainty about the credibility of the newly announced exchange rate regime.
It says this is discouraging the formalisation of foreign exchange transactions.
The report comes slightly over three months after the country’s central bank announced a whopping 44 percent devaluation of the Kwacha, coming closer to the 49 percent slump effected in May 2012.
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At the time, the Reserve Bank of Malawi said the devaluation stemmed from its assessment of the Kwacha, which showed that supply-demand imbalances remained in the market despite adjustments of the rate through the auction system.
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But in its Mem, the World Bank says the depreciation of the Malawi kwacha has not yet resulted in a significant increase in foreign exchange availability.
This contrasts with the liberalisation of foreign exchange markets in May 2022, which led to an immediate boost to liquidity in Authorized Dealer Bank (ADB) foreign exchange markets according to the World Bank.
“Following the May 2022 depreciation, the market stabilized. However, no immediate uptick in foreign exchange liquidity was observed in the weeks following the exchange rate reforms announced in November 2023,” the MEM reads.
Reacting in an interview, Financial Market Dealers Association President Leslie Fatch said the changes that have been made would not yield results in the short-term.
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“We have to look at the long-term and the medium-term. However, that does not mean we should not see a few pointers as to what those results should look like.
“We all agree that the key issue was ensuring that we first get budget support. We have heard the central bank commenting that there are some funds that have come through. Unfortunately, those have been met with a backlog of foreign exchange bills and the money was used to cover that,” Fatch said.
He said the country should expect tangible impact when forex inflow trickles in.
In a recent interview, RBM Director Economic Policy and Research Kisu Simwaka acknowledged that it has been difficult for the economy to generate enough foreign exchange reserves.
He said once the economy stabilises and economic activity starts picking up, the recovery process strengthens, reserves will be able to build up.
“There will always be some element of misalignment that can be tolerated. At the moment, when you look at where the bureaus are, where the parallel market is and where the official is, we believe that the spread is reasonable and therefore it is something that we can tolerate. We are not concerned. We think that the Kwacha has stabilised.
