Dealers weigh in on Malawi Kwacha footing
…as IMF paints gloomy outlook for African currencies
Financial market dealers have painted a mixed outlook for the local unit, the kwacha, saying the currency would remain volatile in the short to medium terms.
The experts say the currency would only gain momentum and move towards stability if the country works towards addressing the prevailing mismatches between forex demand and supply by enhancing exportation.
This comes following an analysis by the International Monetary Fund (IFM) which suggests that most sub-Saharan African currencies have weakened against the US dollar, fanning inflationary pressures across the continent as import prices surge.
In a blog-post on Monday, IMF economists said this, together with a growth slowdown, leaves policymakers ‘with difficult choices as they balance keeping inflation in check with a still-fragile recovery.
Figures available suggest that a one percentage point increase in the rate of currency depreciation against the US dollar leads, on average, to an increase in inflation of 0.22 percentage points within the first year in the region.
In an interview yesterday, Financial Market Dealers Association of Malawi President Leslie Fatch said depreciation of most currencies in the region were driven by external factors, coupled with low levels of exports.
He said the local unit is expected to pick up in the short term, albeit marginally, thanks to the trickling in of forex earnings from tobacco, Malawi’s top export crop.
By the end of last week, tobacco had raked in $28 million (approximately K29 billion) from 13.8 million kilograms (kg) of all types of tobacco sold, up from $960,000 the leaf raked in during the same period last year after the country sold about 600,000kg.
“With the increase in tobacco proceeds, we are hoping for a stable currency. We hope there will be reduced pressure since supply for tobacco would have increased.
“We also think the recent policy rate hike will affect the cost of borrowing, which will reduce aggregate demand. So that may also reduce the pressure on the currency,” Fatch said.
As of yesterday, authorized dealer banks were selling the dollar at K1, 036.24 and buying it at K1, 016.62 according to figures from financial market regulator, the Reserve Bank of Malawi.
Fatch however said the sure way of containing the pressure was by increasing the export base, thereby narrowing the trade gap.
According to Fatch, Malawi, a predominantly importing and consuming nation remains susceptible to pressure on the international market.
“The fact that we will still need a lot of imports as we cannot sustain ourselves locally may be counterproductive to the initiative,” Fatch said.
Speaking at the opening of the 33rd Malawi International Trade Fair yesterday, Malawi Confederation of Chambers of Commerce and Industry President Lekani Katandula said the Malawi kwacha exchange rate has remained rigid for long.
This, according to Katandula, is sustained at the expense of exporters who end up realising less than what they should have realized in local currency from their export revenues.
“Our tobacco farmers getting their dollar earnings converted to Kwacha at K1,036 or less (after bank charges) per US dollar, when other informal exporters are trading their dollars above K1,500 per dollar is an immediate case in point.
“The unintended consequence of this official policy is the creation of disincentives for formal exporters. Some exporters thus end up reorienting towards the domestic market or informal exports to the detriment of our official export earnings,” Katandula said.
In May 2022, the RBM devalued the kwacha by 25 percent in a desperate attempt to stimulate the economy and attract a green card from the International Monetary Fund to woo dornor support.
But the option propelled a further rise of commodity prices.