If there is a year when the monetary authorities and businesses have sweated over the value of the local unit, the kwacha, in the past four years, then it is 2019.
The second quarter of 2019 will be discussed as a period to forget as it was when the kwacha hit a new low trading as low as K820 to the dollar in forex bureaus.
This was after over two years of exchange rate stability at around K730 to the green buck.
The desperation caused traders to start making adjustments to their products as they factored in the cost of an expensive dollar.
What went wrong?
The sharp fall of the kwacha in the second quarter of the year was surprising.
This is so because, traditionally, that is the time the kwacha is supposed to start appreciating as it is the time tobacco sales start.
According to Financial Market Dealers Association (Fimda) President, Patricia Hamisi, the fall was due to both demand and supply factors that the market faced coupled with monetary policy and political uncertainty being an election year.
“This year saw a lot of speculation by the importers due to the uncertainty brought about by elections. You will recall that in 2012, when leadership changed the currency was depreciated from K160 per dollar to K350 over night.
“Pre-election this year, people weren’t certain if current policies were going to prevail post elections. Importers then chose to pay off majority of their bills before elections which significantly increased demand and put pressure on the currency. All this was happening during the country’s lean season which ends with the tobacco season,” Hamisi said.
In addition, this year Malawi experienced delays in opening of the tobacco season which saw it commencing end April and not early March as is usually the case and this created a lag between expectations and actuals.
As if that was not enough, tobacco proceeds did not trickle in at expected levels to support the kwacha.
“Banks usually time their foreign exchange commitments to match the peak of the tobacco season and with the unprecedented proceeds realised, the mismatch between demand and supply grew further.
“On top of all this, the current Monetary Policy which is aimed at reducing interest rates allows access of funds to both individuals and companies leading to increase in consumer demand in the short term. Being an importing country, this means increased demand for imports and increased pressure on the foreign currency in the short term,” Hamisi said.
But Reserve Bank of Malawi (RBM) Governor, Dalitso Kabambe, downplayed the fall, describing it as a blip.
As more and more cross border businesses were steadily losing hope in the value of the kwacha with some speculating that it would stop at a K1, 000 to the dollar, then suddenly, the kwacha started breathing again.
Starting from July the country saw the kwacha gaining ground against the green buck and steadily appreciating.
Analysts attributed this to reversal of the underlying factors that caused the depreciation in the first place.
Among others, the around July the country saw reduced rejection rates from the tobacco floors from a high of 70 percent to around 25 percent which improved the flow of dollars from the tobacco market hence addressing the challenge of supply.
In addition, the country started experiencing reduced kwacha liquidity in the market as the central bank continuously worked on tightening the monitory policy to mop out liquidity in the market.
At the same time, importers had prepaid majority of their bills during pre-election and were left with limited kwachas at their disposal.
In its December 2019 Malawi Economic Monitor, the World Bank says the Reserve Bank of Malawi (RBM) also tightened foreign exchange bureau trading regulations in September 2019, with stiff penalties for speculative behavior and trading beyond specified bands.
World Bank says while a generally stable kwacha supports business confidence, it has, however, contributed to real exchange rate appreciation, which could reduce competitiveness and support higher levels of imports.
Continued strong reserve levels have supported the kwacha’s stability. Gross official foreign reserves have remained in excess of three months import cover throughout the year. Reserves stood at $ 631.6 million (3.0 months import cover) at the end of September 2019, compared to US$ 689.2 million (3.3 months import cover) in September 2018.
Unlike last year, Malawi this year realized subdued earnings from its top foreign exchange earner, tobacco.
According to Tobacco Commission Chief Executive Officer, Kaisi Sadala, a total of 165.7 million kg of all tobacco was traded realizing around US$237 million at an average price of US$1.43 per kg.
The traded volumes, realisation and average price attained were all lower than those attained last year where Malawi sold 202 million kilogrammes, realising about $337.5 million at an average price of $1.67 per kg.
But RBM Director of Communication and Protocol, Mbane Ngwira, recently indicated that the bank sees a stable local trading unit moving forward despite the close of the tobacco season.
“The market normally reacts to surprises. However, the closure of the tobacco marketing season has not come as a surprise. The amount raised from the sales was also expected.
“All in all the impact of tobacco on the foreign exchange market was well known,” Ngwira said.
On her part, Hamisi said the country needs to seriously look at building and diversifying its export base.
She said, tobacco, the major forex earner in this economy, brings in an average of $300 million per year whilst the annual import bill is at $2.5 billion.
“This in itself shows a potential huge imbalance looking at how limited sources of forex the country has. In the short term, if the currency is to see a decreased rate of depreciation, there is need for sustained intervention to ease out demand, coupled with a tight monetary policy by central bank. However, the dilemma is aligning this tight stance with the current low interest rate regime.
“In the long run, the challenge for the economy is to address underlying fundamentals so as to reduce reliance on imports for consumables and thus manage our balance of payments. With the right policy direction, the country should come up with measures to change the country’s economy altogether; Increase local production for consumables to reduce import demand and increase exports to increase foreign exchange supply,” Hamisi said.
With tobacco losing its salt year in year out and with no other single crop in sight to bring the much-needed forex compared to tobacco, it is not rocket science that the country should brace for hard times moving forward.
The ball is now in the court of every Malawian to think big and craft ways of how the country could earn a steady supply of forex to support the fragile kwacha.