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Foreign exchange market queried

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Alliance Capital Limited says the performance of the kwacha against the dollar is raising questions on whether the local currency has proven of to be a divorcee from economic theory.

This follows the adoption of the flexible exchange rate regime in 2012 which saw the kwacha devalued by 49 percent.

. In its weekly report, Alliance Capital Limited argued that when there is an influx of US dollars in the foreign exchange market, it is expected that the price of purchasing those dollars should be going down, holding other factors constant.

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“In simple terms, in such circumstances the kwacha is said to appreciate against the dollar. Granted, economic theory suggests that when supply of a commodity outstrips demand, the price of that commodity is likely to fall holding other factors constant,” the report said.

The firm further said while traditionally, the foreign exchange market in Malawi follows a seasonal pattern, the trend has overtime shown that during the tobacco selling season, there is an increase in supply of US dollars, leading to significant appreciation of the kwacha.

“Evidently, in 2016, the kwacha traded at K750 to a dollar at the onset of the tobacco market then appreciated to K690 to a dollar a few weeks into the tobacco selling season.

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“Conversely, the onset of the lean period in October in which US dollars are in short supply coupled with increased demand due to importation of agricultural inputs such as fertiliser results in the depreciation of the kwacha,” it adds.

In 2017, however, the trend is different. With the private sector’s demand for the dollars being low on account of high lending rates let alone a poor performing economy which now shows signs of recovery, it was expected that the onset of the tobacco market will see the kwacha significantly appreciate against the dollar.

“However, the kwacha has been trading at K724 to a dollar since November 2016.This trend raises a number of questions such as; have the authorities in this case the RBM, abandoned the flexible exchange rate regime and has the kwacha and dollar finally found an equilibrium value?” the company questions.

According to Alliance Capital Limited, equilibrium in the kwacha- US dollar market should be good news to the private sector, farmers and the economy in general.

“For the private sector, such a stable exchange rate facilitates proper business planning as it ensures certainty in foreign exchange transactions.

“For farmers, the stability of the kwacha means that they do not suffer exchange rate losses during the selling season during which the kwacha usually appreciates against the dollar, provided such stable kwacha is maintained during the lean season,” the report said.

Experts think for the general economy, a stable currency is one pointer which foreign investors look into when making a decision to invest in a country.

Alliance Capital Limited, however, says any attempt to create such stability by other means has the potential of creating a cosmetic unsustainable foreign exchange market scenario to the detriment of the economy.

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