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Experts differ on forex, exchange rate outlook

RISING—Foreign exchange reserves

Frank Chikuta

Economic experts are divided in opinion on what the short to medium terms hold for the country’s foreign exchange position and performance of the Kwacha against other currencies.

This follows revelations that, in recent weeks, the country’s foreign exchange position has registered minimal growth as opposed to declines registered earlier.

The Kwacha was also been appreciating against major trading currencies on the exchange market.

This is contained in a weekly financial market developments report for the week ending December 31 2021, published by the Reserve Bank of Malawi.

The report indicates that gross official foreign exchange reserves increased by $12.2 million to close the review period at $429.2 million, representing 1.72 months of imports.

This follows another $5.1 million increase recorded during the preceding week.

“Activity in the foreign exchange retail market significantly dropped during the review period, being the climax of the festive season that is characterised by holidays. Authorised dealer banks (ADBs) purchased a total of $8.13 million from their customers compared to $32.98 million recorded during the preceding week. On the demand side, ADBs sold a total of $7.60 million compared to $29.26 million recorded during the preceding week.

“The Kwacha maintained a steady appreciation path against the US dollar for three consecutive weeks. In the process, the local unit gained 0.40 percent (about K3.32) during the review week to close the year at K819.4421 per US dollar. During the same period, the Kwacha gained 1.19 percent (about K13.77) against the Euro and 6.82 percent (about K4.22) against the South African Rand. However, the local currency lost 0.56 percent (about K6.75) against the British Pound,” the report reads.

Commenting on the development, Economics Association of Malawi (Ecama) Executive Director Frank Chikuta said, in the absence of a complete set of information on the sources and uses of foreign exchange, one is inclined to assume that the improvement is temporary.

“Our outlook is still hazy because the structural issues which affect the economy’s foreign exchange generation capacity have not been addressed,” Chikuta said.

However, economist Sane Zuka believes the development shows that the economy is on a path to recovery.

He said, like many other economies, it is no secret that Malawi’s economy has been greatly affected by the Covid pandemic. However, there is hope that interventions targeted at containing the same are working.

“While we are still facing structural challenges, there is a rebound of economic activities, especially in the construction, agricultural and tourism sectors, which have started picking up. The gains in forex reserves and appreciation of the Kwacha are particularly resulting from deliberate controls that the Ministry of Finance has instituted to control expenditure.

“While still facing challenges, the fight against corruption is also bearing fruits as fewer resources are lost. Going forward, Malawi’s economy remains fragile to the unpredictable Covid pandemic, unpredictable global fuel prices and the current rainfall pattern,” Zuka said.

“Four things remain crucial to the stability of the Kwacha and registering gains in import cover for the kwacha. Firstly, controlling unnecessary government expenditure is a must. Second, prudent use of government resources to fund infrastructure development has a multiplier effect. Third, promoting value-chain agricultural investments is a rewarding pathway to increasing the value of exports and, lastly, stopping corruption is the support engine that Malawi urgently needs.”

In recent months, the country’s forex reserves have remained low, averaging 1.6 months of imports against a three month threshold.

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