The continued depreciation of the Malawi kwacha is a result of a combination of a strengthening United States dollar and the lean season of the Malawi economy which has increased demand for foreign exchange at a time supply has dwindled, a financial advisory firm has said.
In its Monthly Economic Brief for December 2015 released on Thursday, Nico Asset Managers says the exchange rate is expected to continue depreciating in the short term as the lean season continues.
It says, however, this could be mitigated if the Reserve Bank of Malawi (RBM) sells forex to the private sector as the central bank currently has sufficient foreign exchange reserves.
RBM, through its Financial Market Development Report for last week, indicated that it had US$639.04 million or 3.06 months of import cover by December 31, an increase from US$637.38 million or 3.05 months recorded on December 24 and US$605.67 million or 2.90 months of imports registered on December 18, 2015.
Nico Asset Managers says, however, that the kwacha will continue to depreciate in the medium term due to the significant current account deficit and weak foreign direct investment inflows despite tobacco exports and improved forex reserves.
It also says inflation will remain elevated in the short term as the kwacha depreciates and food prices increase.
The El Nino weather effects may also hamper agricultural output in the 2015/16 agricultural season through delays of rains and flooding if the risks are not mitigated.
The International Monetary Fund (IMF) has since urged the government to maintain tight fiscal and monetary policy until inflation returns to a clear and declining trend.