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Experts question Kwacha strength

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Economic and financial market experts have questioned the valuation of the local trading unit, the Kwacha, against major trading currencies, saying the current fundamentals do not support its stability.

The development comes at a time the Kwacha has remained relatively stable in Authorised Dealer Banks, hovering at around K825 to the dollar, despite the country having very thin reserves to support the exchange rate.

Ecama Executive Director Frank Chikuta said the economists’ body is of the view that the exchange rate should be correctly valued to support exports and contain imports.

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Chikuta said since the country is in a flexible exchange rate system, the currency should freely adjust to the appropriate value.

“We are wondering if it is correctly valued. There is a need for a study to ascertain this.

“As of 17th December 2021, gross reserves were at 1.65 months of imports. So, we are saying that the fundamentals do not support the recent stability in the exchange rate,” Chikuta said.

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On his part, Financial Market Dealers Association (Fimda) President Maclewen Sikwese agreed with Ecama’s observation that the local currency is overvalued.

Sikwese said the Kwacha has been overvalued since 2018 but that the level of the overvaluation is steeper now than before.

“Principally, the overvaluation has been a function of artificial controls in the level of the Kwacha which has, from 2018, not been allowed to respond to market demand and supply dynamics.

“Whilst theoretically a fairly valued exchange rate should help rein in on imports and boost exports from affordability and competitiveness perspectives respectively, what is critical is to look at the sensitivity of our exports and imports to exchange rate changes,” Sikwese said.

He observed that on exports, the key is to ascertain excess productive capacity for exports that is being underutilised due to lower Kwacha equivalent returns on exports.

According to Sikwese, if that is the case, then an adjustment of the exchange rate should boost our exports quickly.

“On imports, the bigger the percentage of the country’s imports that are not very critical to the running of the economy, the bigger the impact of a weaker currency on the overall import bill.

“However, if the country’s import bill is predominantly made up of critical imports for the functioning of the economy like fertilisers, fuel, pharmaceuticals, foreign debt repayments then the overall impact of the weaker Kwacha on the import bill will be muted,” Sikwese said.

He said, looking at the country’s import data, consumables present the biggest opportunity for reduction in the country import bill from a weaker Kwacha,

Reserve Bank of Malawi spokesperson Ralph Tseka asked for more time before he could comment on the matter.

Speaking when he launched the second National Export Strategy, President Lazarus Chakwera expressed confidence that the roll out of the strategy would help Malawi tilt the trade balance in its favour.

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