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Kwacha grip remains loose

As authorised dealer banks, parallel rate spread widens

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Ralph Tseka

Pressure is still mounting on local unit, the Kwacha, as it continued depreciating against other major currencies on the foreign exchange market.

As of Wednesday, the Kwacha was trading at around K820 to a dollar in some authorised dealer banks (ADB) compared to K965 on the parallel market, creating a spread of K145.

For the greater part of the year, the unit has remained volatile, even at the peak of tobacco selling season, a time of the year when traditionally the currency gains momentum as forex from leaf sales trickle in.

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In a recent interview, RBM spokesperson Ralph Tseka attributed these trends to market forces.

“The market forces of demand and supply are what play into the depreciation or the appreciation of the currency; therefore, what determines the value of the Kwacha are these fundamentals and this is what continues to be the case,” Tseka said.

But economists feel deliberate policies should be undertaken to help contain the pressure.

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In an interview on Tuesday, University of Malawi Economics Professor Ben Kalua said demand for forex remains higher than supply.

“This is what the International Monetary Fund uses to know whether your currency is misaligned or not. The central bank knows that the true value of the Kwacha is the price on the black market,” Kalua said.

In a separate interview, Financial Market Dealers Association (Fimda) President Client Mclewen said there would always be disparities of rates between ADB and parallel (or black) markets.

He said since the parallel market is predominantly cash, the costs of procuring and handling cash are far more than the costs of providing foreign exchange in the formal market, and, therefore, a more relevant comparative would be the cash rates in the formal bank and forex bureau sector and the parallel market.

“However, widening of the gap in the rates between the official and parallel market portrays an increasing demand and supply imbalance that is pushing buyers of foreign exchange to buy from the more expensive parallel market compared to the relatively cheaper official markets due to ease of access or availability in the parallel market.

“The Kwacha has continued to depreciate during the year due to the existing demand and supply imbalances and the widening gulf between the official and parallel market is just indicative of potential value of the Kwacha against other currencies in the near future in case the supply constraints are not addressed timely,” Mclewen said.

On outlook, he said the local unit is expected to remain under pressure in the short term, chiefly due to foreign exchange supply constraints and emerging demand as the world economies reopen.

Economics Association of Malawi Executive Director Frank Chikuta said the main indicator of strength of the currency remains forex reserves position, which has deteriorated in recent months.

“You would have noted that the reserves position is still below the three months threshold; so, when there are troubles on the formal market you would see that the rate on the black market widens. At the moment the value on the black market is the true value of the Kwacha,” Chikuta said.

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