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Kwacha shows signs of stability

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The Kwacha showed signs of stability in January and marginally gained ground against some foreign currencies, latest figures from the Reserve Bank of Malawi (RBM) have shown.

Ironically, during the period under review, Malawi was grappling with low levels of forex.

A document showing actual market foreign exchange rates published by the central bank on Tuesday shows that, at the beginning of the month, the Kwacha was trading at K824.48 but closed at K824.79 against the United States Dollar.

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This represents a depreciation of 0.037 percent to the dollar.

The RBM figures show that the local unit gained by 2.22 percent against the South African Rand, having closed the month at K62.40 from K63.82 at the beginning of the month.

Against the British Pound, the Kwacha opened at K1196.34 and closed at K1268.22 while against the Euro it opened at K1196.52 and closed at K1097.60 in the month under review.

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In a response to an emailed questionnaire, economist Sane Zuka said the Kwacha stability portrays that the economy is on a path to recovery.

He said the month is Malawi’s lean period and maintaining stability of the Kwacha is relatively difficult due to seasonal government expenditure obligations.

“While current performance of the Kwacha largely reflects deliberate government policy action to control unnecessary expenditure, stabilisation of the Kwacha is coming against constrained import flow.

“There is hope that the performance of the Kwacha will greatly improve in the coming months especially as we move towards the harvesting period. However, Malawi’s economy is still very susceptible to local and external shocks such as fuel price movements and natural disasters,” Zuka said.

He added that such shocks had the potential to take away the gains resulting from policy action.

“It is important that the national budget should always provide resources and contingencies for addressing such risks. Going forward, Malawi and other countries in Southern Africa should be thinking of effective insurance arrangements that cover such incidences,” Zuka said.

In an interview, Financial Market Dealers Association Vice President Jim Kalua said the relative stability of the Kwacha does not reflect fundamentals on the ground.

He attributed the situation to closure of companies for the festive holidays, among other things.

“You may wish to know that most companies, both importers and suppliers, do close for festive season holidays; as such, economic activities were slow.

“In terms of [forex] reserves, no major movement has happened. Import cover moved from 1.62 months in October to 1.6 months in Jan 2022,” Kalua said.

Recently the International Monetary Fund (IMF) said allowing for greater flexibility in the exchange rate, containing external imbalances, and rebuilding reserves were critical in reducing Malawi’s vulnerabilities to external shocks.

In its Country Report No. 21/269, the IMF says, given the chronic shortages of foreign exchange and low reserves, and to support the start of the adjustment, a rapid adjustment towards a market-clearing exchange rate is necessary.

But the government is of the view that allowing for a rapid greater flexibility in the exchange rate will result in a spike in inflation as was observed in the 2012 episode.

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