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Who will generate foreign exchange?

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Ralph Tseka

For the past couple of weeks, Abdul, a hardware merchant in Lilongwe, has been restless as he has been struggling to get foreign exchange to import new merchandise.

He says, everyday, he keeps on sending back customers looking for hardware and construction materials.

“Things are not okay. There is no forex on the market. I don’t know what will happen in the coming months but, honestly, things are terrible,” he says.

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Equally affected by the foreign exchange problem is Maria Banda, who runs a cross border business, importing items from China into Malawi.

According to Banda, it is now taking her a very long time to get the much-needed foreign exchange.

“Authorities need to do something; otherwise, things are not okay. We need forex to keep our businesses afloat,” Banda says.

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Abdul and Banda are just a tip of the iceberg.

Many other businesses, both large and small, have been forced to delay import programmes as the green buck remains elusive.

For a long time, Malawi has relied on tobacco to generate the much-needed forex for her import needs. However, over the years, the forex from tobacco has been significantly dwindling up to the point that they can hardly sustain one month of imports.

For example, this year, Malawi has realised a total of $197.1 million from the green gold which is just enough to keep the wheels of the economy for only 23.6 days.

Presenting a paper on ‘Recent Economic and Market Developments and Outlook’ during the 2021 Financial Market Dealers Association Annual Conference in Mangochi District at the weekend, Reserve Bank of Malawi Director of Financial Markets Kisu Simwaka said Malawi is in a precarious position as it requires about $3 billion for her imports every year when at the same time the country produces about $1 billion worth of exports.

This, according to Simwaka, leaves the country with a very big deficit of $2 billion every year.

On a monthly basis, Malawi needs an average of $250 million to cover for her imports. Critical imports include fuel, fertiliser and medical drugs.

“In other words Malawi can only provide for 33 percent of her forex needs. The question we need to ask ourselves is where does the remaining 67 percent of forex come from?” Simwaka said.

Market analysts note that Malawi’s failure to generate enough forex to finance its imports has been around for over a decade now and that the economy has been supported by other means such as donor inflows to both government and the private sector as well as other strategies such as currency swaps.

This has had a significant impact on the country’s forex reserves and the exchange rate.

According to RBM Financial Markets Development Report for October 19 2021, as at September 30 this year, Gross Official Reserves stood at $521.87 million or 2.09 months of import cover. This was against the internationally accepted buffer of 3 months.

On the other hand, Private Sector Reserves stood at $386.05 million or 1.54 percent of import cover.

Asked on strategies the central bank has in place to alleviate the current forex squeeze, RBM spokesperson Ralph Tseka, in a written response said the central bank’s mandate is to hold and manage the country’s official foreign exchange reserves as well as implement the exchange rate policy.

Tseka said, in that regard, the ultimate goal remains to secure a healthy official reserves position that is sustainable in the long-term with objectives to provide confidence in the market about stability of the exchange rate and, at the very basic level, guarantee importation of strategic commodities and services.

According to Tseka, the current levels of gross official reserves and the production structure of the economy where exports are greatly outpaced by imports necessitates that the central bank prioritizes the later objective and limits interventions to only support importation of strategic commodities.

“The objective of ensuring Kwacha stability is still pursued in most practical way possible as explained by short-and medium-term measures below. It is envisaged that the government, the private sector and the general public will play their rightful role of generating foreign exchange for the country through expansion of the export sector and curbing appetite for imports, respectively.

“This is the sustainable way to restore the supply-demand balance in the foreign exchange market and allow the central bank to equally pursue both objectives,” Tseka says.

He notes that as short term measures, the re-introduction of the surrender requirement of export proceeds that requires exporters to sell at least 30 percent of export proceeds to ADBs upon receipt, is expected to cushion the foreign exchange market.

This, he says, will be complemented by central bank monetary policy open market operations that targets mopping up of excess banking system liquidity and in process reduce demand for foreign exchange.

Due to the mounting pressure on the local unit created by the critical shortage of forex, the kwacha has shed about 6 percent of its value since the start of the year.

Fimda President Maclewen Sikwese observes that the current pressure on the local unit, the Kwacha, is expected to persist in the short to medium terms due to rising demand for forex.

Sikwese says as economies continue to open up due to the easing of the Covid pandemic, demand for commodities is expected to surge, leading to further rises in demand for forex.

Chancellor College Economics Professor Ronald Mangani says the country’s financial market players have been partly to blame for the delicate foreign exchange situation for Malawi as they have supported consumption at the expense of consumption.

Mangani says most of the loanable funds have gone towards government, wholesale and retail sectors of the economy with very little going towards manufacturing which would boost exports.

While businesses have embraced the Importing Nation label and are busy scrambling to the few dollars that are there in the market, the Malawi Investment and Trade Centre (MITC) says time has come for the country to take advantage of the various market opportunities that have opened up in the region to increase their productive capacities and earn the much-needed forex.

MITC Chairperson Karl Chokhotho says his institution has identified lucrative markets for agriculture products such as legumes and livestock and other traditional crops across the world.

Among other markets, Chokhotho said 218 tonnes of sesame seed is being demanded in China and the United Arab Emirates, 98,000 tonnes of beans in Tanzania, South Africa and Zimbabwe, 35,000 tonnes of rice in DRC, tea, macadamia nuts and coffee in Japan.

He added that cow peas, pigeon peas, soya, and sunflowers are needed in countries like India and Zimbabwe, respectively.

He encourages local farmers to aggregate themselves and form cooperatives because one smallholder farmer cannot satisfy the demand.

In his presentation at Fimda conference Simwaka said, any economic growth that is not led by exports is not sustainable for Malawi.

“We need to engage an extra gear in farming and move a step or two higher in the agricultural value-chain by exporting value-added products which attract better prices,” he says.

Simwaka further notes that the tourism sector also has potential to earn Malawi some increased levels of forex if well developed.

So as Malawi begins on a journey to transform the local economy into an upper middle income one by 2063, there is need for some serious thinking which sectors would propel us in that direction and most importantly, where will we get the forex.

That is to say business person like Abdul and Banda need to not to lose sight of the fact that for import businesses to remain resilient, they need forex which nobody, except a few tobacco and regumes farmers are generating at the moment and is proving to be not enough.

It is time for every Malawian to start thinking of ways of attracting the dollars into Malawi.

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