Firm sees mounting pressure on kwacha
By Taonga Sabola:
Investment management and advisory firm, Alliance Capital Limited, has said it sees the kwacha-dollar exchange rate remaining broadly stable but elevated in the near term.
In its First Half Economic Report, Alliance Capital attributes the outlook to the current political uncertainty, which would keep demand, mainly from speculators, elevated.
The firm says the situation would be compounded by the limited supply of the green buck as the country enters the lean period.
“Overall, we expect the kwacha to depreciate in the medium to long term due to supply and demand mismatches,” the report reads.
The kwacha has been losing valuable ground against the dollar in recent months despite the onset of tobacco sales.
As at noon Wednesday, the dollar was hovering around K825 in foreign exchange bureaus, up from around K740 at the start of the year.
Alliance Capital further says it expects elevated pressure on inflation in the second half of the year emanating from rising food prices.
“First, food prices have risen and are expected to be above average on account of rising demand especially from the southern parts of the country which were affected by Cyclone Idai.
“Second, the kwacha has depreciated and oil prices have steadily risen on the global market. All these will most likely negatively impact the current direction of inflation,” Alliance Capital says.
It implores monetary authorities to exercise caution during their next meeting.
“We, therefore, expect the benchmark interest rate, the policy rate, to remain where it is for the next few months and only to change when the outlook changes considerably,” the report says.
Financial Market Dealers Association President, Patricia Hamisi, recently said the country needed to seriously consider building and diversifying its export base.
Hamisi said, tobacco, the major forex earner in this economy, brings in an average of $300 million per year while the annual import bill is at $2.5 billion.
“This, in itself, shows a potential huge imbalance, considering the limited sources of forex the country has. In the short term, if the currency is to see a decreased rate of depreciation, there is need for sustained intervention to ease out demand, coupled with a tight monetary policy by the central bank.
“However, the dilemma is aligning this tight stance with the current low interest rate regime,” Hamisi said.
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