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The US dollar strength over African currencies

African economies, Malawi inclusive have since January this year been facing economic hardships, due to the gain strength of the US dollar and the devaluation of the Chinese Yuen.

For some months, the Malawi kwacha has been depreciating against the US dollar forcing speculations within the market that by December the kwacha/dollar exchange rate will hit K1000.

Economic commentators in the country have also called on the central bank to inject more foreign currencies in the central banks as a way of stabilizing the kwacha.

Fingers have been pointed and the citizenry has blamed the country’s President Peter Mutharika for failing the country economically.

But is the problem really the current government administration?

Global economic trends, since January 2015, have shown that the economic instability has spilled across the African continent.

Cause for currencies fall

The Weekly News highlights that the currency fall begun innocently enough, with a fall in markets in China. The plunge that started in Asia has continued to gather momentum. It now looks very worrying indeed. Stock markets in Shanghai, China, Germany and Europe have now lost all the gains it made in 2015. The Eurofirst 300 index, last week had its worst day since 2009.

The pain extends beyond stock markets. Emerging-market currencies from the South African rand to the Malaysian ringgit are tumbling. Commodities are also sinking. Oil has hit a six-and-a-half-year low. A broader index of 22 commodities compiled by Bloomberg is at its lowest since 1999.

The proximate cause for all this is a chain of events that began with the surprise devaluation of the yuan in August. More than US$5 trillion has been wiped off on global stock prices since then.

A weakening outlook for Chinese growth, and a slip in China’s currency, has combined to put pressure on other emerging economies especially those whose growth model depends on Chinese demand for industrial and other commodities.

Also emerging markets have also been squeezed by the US Federal Reserve, which has been preparing the world economy to expect the first interest rate rise in nearly a decade in September. Tighter monetary conditions in America have led to reduced capital flows to big emerging economies, to a rising dollar, and to more difficult conditions for firms and governments with dollar-denominated loans to repay.

The global economy is right in the middle of a significant transition, in other words, as rich economies try to normalise policy while China tries to rebalance. That transition is proving a difficult one for policymakers to manage, and markets continue to be strained.

South Africa rand

While the Kwacha is currently trading at around K600 against the dollar, the greenbuck continues to gain strength in Malawi’s trading partners within the region.

Beginning August the South African rand has seen a further fall, which has been described as not necessarily a bad thing by the country’s authorities.

South Africa’s Reserve Bank governor Lesetja Kganyago said on Saturday, the currency should be allowed to play its role as a shock absorber.

He said to the extent rand depreciation was part of a global foreign exchange rebalancing, and it need not be a worry.

“Our assessment of the South African economy is that the risk to the economic outlook is on the downside.

“It doesn’t follow that the depreciation of the rand is a bad thing for South Africa, if anything, it should spare the export sector” and (importers),” he said.

South African Finance Minister Nhlanhla Nene told Reuters markets have priced in a US interest rate hike and are unlikely to see big spillovers from policy normalisation in the world’s largest economy.

“The communication and the cooperation that we’ve been having from the US have actually helped. That is why I don’t think it’s an issue that might have huge, unexpected spillovers,” he said.

Zambia kwacha

In Zambia the kwacha depreciated heavily against the US dollar on 22 September 2015 as compared to the close of business on 21 September 2015.

The slip of the kwacha against the dollar forced Zambia president Edgar Lungu to make a statement. In his statement he said continued difficulties in the global economy and the unprecedented strengthening of the US dollar has sent all currencies including our national currency, the kwacha on a downward spin.

He said the Kwacha depreciation has in the recent past accelerated largely due to the trade imbalances that we are experiencing because the imports are in excess of the exports which have reduced both in volume and value. This is a major function of low commodity price levels globally.

The Bank of Zambia governor Denny Kalyalya also indicated that he has no plans to halt the depreciation.

“It is very clear what our policy is, we are going to maintain a flexible exchange rate,” he said.

Mozambique metical

The currency of Mozambique, the metical, in recent months has also suffered a sharp devaluation due to the strengthening of the dollar and the current account deficit of the balance of payments, according to the Bank of Mozambique.

The spokesman for the Bank of Mozambique said the Mozambican currency had also recorded losses against the euro and the South African rand, with annual depreciation of 4.5 percent and 11.07 percent, respectively.

Tanzania shilling

The Tanzanian shilling is not spared as well even though it has made a quick last-minute U-turn seen at the start of a new strengthening trend as the market approaches end of the month.

The shilling has the trend of appreciating at the end of the month when its demand swells due to corporates’ end of the month monetary obligations.

Malawi kwacha

As a country, we live in a global village, hence the global effects of the economy cannot passover us. Regionally, South Africa is one of Malawi’s major trading partners, while globally, China and America remain Malawi’s trading partners. Obviously, the shocks experienced in these economies are expected to spill over into Malawi.

Much as speculation is fuelling the dollar scarcity on the market, unless the major market stabilizes, then Malawi will also see an ease in its currency.

Future predictions

According to The Economist of September, 2015 it is rare for economists, particularly those at an investment bank, to forecast a recession.

However, Willem Buiter, once a member of the Bank of England’s Monetary Policy Committee and now the chief global economist of Citigroup, a bank, has been willing to go out on a limb. He defines a global recession, not as a period of falling output, but as a period during which the actual unemployment rate is above the natural unemployment rate or the time during which there is a negative output gap; the level of actual GDP is below the level of potential GDP.

Translating his definition, Buiter predicts a moderate global recession starting in the second half of 2016.

He cites the very weak indeed negative world trade growth in the first half of 2015, the continued weakening of (real) commodity prices, the weakness of the global inflation rate, the recent decline in global stock prices, plus indications that corporate earnings growth is slowing down in most countries, and the unprecedented decline in nominal interest rates, as contributors to the moderate recession.

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