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Pressure on kwacha

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By Taonga Sabola:

Pressure has started mounting on the local trading unit, the kwacha, as the country passes through the lean foreign exchange period, investment management and advisory firm Alliance Capital has said.

In its October 2018 Economic Report released Wednesday, Alliance Capital says the kwacha has steadily depreciated against the dollar since September 2018.

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As at October 5 2018, the foreign exchange reserves stood at $690.48 million (3.3 months) down from $745.49 million (3.56 months of cover) recorded on September 5 2018.

“The tobacco market is closed and we are in the lean period, therefore we expect the kwacha to continue depreciating. We forecast the kwacha to close the month of November trading at a mid-rate of K730/$.

“We expect volatility to persist on the kwacha-rand and kwacha-sterling pairs albeit with a depreciating bias,” the report says.

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Malawi’s gross official forex reserves were drawn down significantly after the onset of the lean period but remained above the internationally recommended three months cover.

Against the South Africa rand and British pound, the kwacha moved in a narrow range albeit with a depreciating bias in October.

The strength of the local unit against the pound sterling and rand mainly reflected the weakening of these two currencies on the global market.

The pound sailed through turbulent waters in the month falling to a six week low following political worries surrounding Brexit and the release of weaker than earlier anticipated inflation data.

The kwacha-pound exchange rate opened the month trading at K947.2469 and closed at K925.72 To the rand, the local unit opened the month trading at K51.638 and closed trading at K50 with oscillations in between.

However, the rand broadly weakened in the month following a speculative report which said the United States was preparing for another fresh round of tariffs against china.

The rand was again battered by a report by Moody’s, a credit rating firm, which argued that the budget estimates presented by South Africa’s Minister of Finance, Nhlanhla Nene were a credit negative.

The firm further says it expects yields on short term government securities to track the policy rate albeit with an upward bias in light of the widening fiscal deficit.

“We expect no change in the pace of liquidity management operations. This will in turn result in elevated but stable interbank money market rates,” Alliance Capital says.

On inflation, Alliance Capital says it is useful to read into the direction of the drivers of inflation which also shape inflation expectations of firms and households looking ahead.

It says the upside risks to inflation path include the continued depreciation of the kwacha, rising prices of utilities, fuel and food which chiefly determine headline inflation.

In its September 2018 Monetary Policy Report, the Reserve Bank of Malawi predicted that the exchange rate would remain stable in the short-run given the sufficiency of the reserves and tight liquidity in the foreign exchange market.

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