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‘Troubled’ Kwacha

Drops by 5.7% since January

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Ben Kalua

The local unit— the Kwacha— continued losing value against major trading currencies on the foreign exchange market, depreciating by about 5.7 percent against the United States (US) Dollar since January 2021.

Experts attribute the Kwacha volatility to, among other things, pressure emanating from existing imbalances of forex supply and demand in the country.

As of Tuesday, the local unit was trading at about K959 against the US dollar in most authorised dealer banks (ADBs) compared to an average K955 on the parallel market.

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Figures from the Reserve Bank of Malawi (RBM) show that, between January and October, the Kwacha depreciated by 12.3 percent against the South African Rand, having dropped from K50.1 to K56.3.

Against the dollar, the Kwacha lost value by about 5.7 percent from K778 to K823.48.

The local unit also lost value to the Great British Pound by 7.8 percent from K1,051 in January to K1,147 in October. While against the Euro the Kwacha depreciated by 3.3 percent from K928 to K986.

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Financial market experts say, overall, for a greater part of the year, the spread ADB and the black market remained wide and this has partly been piling pressure on the local unit.

In an interview Tuesday, Financial Market Dealers Association (Fimda) President Mclewen Sikwese said the pressure was expected to persist in the short to medium terms due to rising demand for forex.

He said, as economies were opening up due to the ease in Covid pandemic cases, demand for commodities would surge, leading to a further rise in demand for forex, locally.

“A gradual and moderate rather than a steep depreciation of the Kwacha is more likely as the demand is expected to increase slowly, reflective of the tentative nature of government decisions on opening economies,” Sikwese said.

He then urged authorities to work towards deploying policies that would necessitate strengthening of the local currency.

“On demand, it is important to ensure use of that the foreign currency resources in the country is chiefly either into areas that will generate foreign exchange, therefore self-sustaining, or into import substituting areas which will make it self-sustaining,” Sikwese said.

University of Malawi Economics Professor Ben Kalua said low inflow of forex due to suspension of the International Monetary Fund’s Extended Credit Facility coupled with seasonality of the exertion of economy have contributed to the pressure on the local unit.

“The exchange rate is the price of forex. If you fix the exchange rate, it will not give any signal for incentives for people to react to it. This is the reason some countries even undervalue their currency.

“When the Kwacha falls, you are giving an incentive to people who are exporters so you are promoting economic restructuring. People will move to areas where they can export to earn more Kwacha per dollar,” Kalua said.

In a recent interview, RBM Governor Wilson Banda also attributed the Kwacha depreciation to market forces.

“If we are in a situation where demand is higher than supply, you will find your currency depreciating and that is what we have been seeing in Malawi.

“Currently, we are constrained because demand is still high and that is putting pressure on the exchange rate and that is why the kwacha is depreciating,” Banda said.

He said the medium to long term strategy was to increase supply through export growth and diversification.

In the short term, Banda said the central bank was attempting to get some accommodation from regional banks and other institutions to ensure that Malawi has enough foreign currency.

“This is a dynamic environment; so, we are adjusting when we see the situation on the ground. But for the fruits of the current efforts to be enjoyed, we are looking at next year and beyond but as soon as we get the fund, it might help us to slow down the depreciation of the currency,” Banda said.

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