Gains, pains of kwacha depreciation

The local unit, the kwacha, has continued trekking on its weaker path at least since the beginning of the second half of this year falling by at least 30 percent.

While the ceding of the currency has excited other segments of society such as tobacco growers, others such as importers of capital equipment, farm inputs and basic goods and services are not too happy.

Why? They (importers) have to raise more kwachas to finance for the same consignment of imports in the wake of a weakening kwacha.

Kwacha has shed about 30 percent to the dollar
Kwacha has shed about 30 percent to the dollar

 

A depreciation, which occurs in a floating exchange rate system, simply means a fall in the value of a currency resulting in imports becoming more expensive.

The same means that exports become more competitive and appear cheaper to foreigners. This, according to international trade economics, will increase demand for exports.

But in the context of Malawi—a net importing and consuming country— it is importers who are loathing the sudden steep fall in the value of the local currency.

Economics as a discipline entails that a depreciation or devaluation of a currency induces a greater degree of improvement in the country’s current account.

Ideally, with exports more competitive and imports more expensive, the country should see higher exports and lower imports, which will reduce the current account deficit, but for Malawi, unfortunately, this has not been the case since time immemorial.

The gap between imports and exports is currently estimated in excess of $1.5 billion, one of the world’s highest trade gap, according to latest data.

Surrendering kwacha

The local currency has significantly continued to slip against the dollar for years running.

Reserve Bank of Malawi (RBM) statistics reveal a progressive fall in the value of the local currency against major convertibles since 1985.

The kwacha was at some point in the 1980’s at par with the United States (US) dollar before weakening to a mid-rate of K1.60 in January 1985 to K1.70 in January 1986 and K1.90 in January 1987.

In January 1988 the currency traded at a mid-rate of K2.29, January 1989 (K2.62), January 1990 (K2.68), before sliding further to K4.38 in January 1993.

It hit K50 in May 2000, before plummeting to hit a K100 mark in August 2003 and K150 in February 2010 and K250 to the dollar in May 2012 when the then president Joyce Banda devalued the currency by 49 percent before subsequently liberalising the foreign exchange market.

Three years down the line, the currency finds itself in yet another shocker, tumbling to a record low of K610 in most foreign exchange bureaus and of course nearing K650 on the black market, while averaging around K550 in most authorised dealer banks (ADBs) as of Monday, September 7.

Economic experts have repeatedly said the application of various types of exchange rate regimes has also partly contributed to the loss in the value of the currency over the years, let alone Malawi’s inability to grow her export base is the major factor.

Malawi has applied both the extreme textbook exchange rate regimes of fixed and flexible exchange rate.

Most recently, RBM and authorities have embraced a flexible exchange rate regime, which is the one that has left the value of the kwacha to be determined by the free interplay of market forces of demand and supply in the foreign exchange market.

But some two years ago, money market analyst Chikavu Nyirenda warned of severe consequences of a flexible exchange rate regime.

Today Nyirenda must feel vindicated as he told Business Review then that sustainability of the then ‘new floated’ regime could be a challenge to monetary policy makers especially in the wake of Malawi’s inability to accumulate foreign exchange.

Whether a flexible regime is doing Malawi good or not is a huge debate, but it is imperative to analyse the prevailing sudden and sharp kwacha depreciation.

Mixed fortunes

Some businesses, both small and large are left counting the cost of the weak kwacha today.

The Indigenous Business Association of Malawi (Ibam) fears that the continued tumbling of the kwacha means ‘tough times ahead for local businesses’.

Mike Mlombwa, Ibam president, projects that if monetary authorities take the business as usual approach to managing the kwacha, the currency might hit an all time record low of K1 000 against the green buck.

He blames the sudden sharp kwacha fall on continued overdependence on donors and government’s huge appetite for foreign companies to handle its contracts.

“Most businesses or contracts are going to foreigners. I can tell you that most of these [foreign contractors] are not patriotic enough as they are busy externalising foreign exchange; hence, creating artificial scarcity of foreign currencies,” claimed Mlombwa.

Business giants such as the Malawi Stock Exchange (MSE)-listed Press Corporation Limited (PCL), in its half-year financial report, points out that with the current volatile exchange rate it makes the operating environment for business vey hostile.

“The operating environment is currently characterised by compressed disposable income, high interest rates, volatile exchange rates and high inflation and all these had a negative impact on the performance of the Group [in the first half of the year to June 30],” the statement reads in part.

PCL is also apprehensive about the future saying prospects for the second half of the year point to a challenging operating environment with high inflation, a weakening local currency and low consumer spending.

Gainers of kwacha fall

But while others are crying foul, predicting gloom and doom, some exporters are making a quick fortune, and smiling all the way to the bank.

Alexander Phodogoma is one of them. He is a scrap metal exporter who normally exports his goods to Tanzania and to the rest of the Southern Africa Development Community (Sadc) region.

Phodogoma, also a general secretary for Central Region Scrap Metal Dealers Association, says the weaker kwacha means the exporting business will thrive and they will employ more people and scrap metal business will expand

“We lost a lot of money during the last quarter of 2014 when the kwacha was so strong but now I can tell you that the weak kwacha has paid me dividends more especially last month [August],” smiled Phodogoma who is based in Lilongwe.

Tobacco grower in Dowa, Martin Banda, is also all smiles after selling his leaf in August.

“The exchange is good unlike the past two months when we were robbed because kwacha was gaining,” said Banda.

But consumer rights watchdog, the Consumers Association of Malawi (Cama) expresses concern over the authorities’ failure to put in place lasting measures to halt the sharp slide.

Cama’s executive director, John Kapito says it is depressing and confusing that the depriciation is coming at a time when government has been claiming that the economy is on track with huge forex reserves estimated at $988.73 million (or about 5.75 months of import cover).

“Unfortunately, the current depreciation of the kwacha is coming at a time when the economy is already bleeding, when the consumers’ incomes are eroded.

“Most Malawians are currently unable to meet the cost of their daily needs and most manufacturers and traders are unable to produce and sell more goods because demand for such goods and services has diminished because of the high prices mostly influenced by the depreciated kwacha,” said Kapito.

 

Kwacha prospects

Earlier in July, RBM implemented various forex trading guidelines that it hopes will control the pace of the currency depreciation in the short-term.

The new guidelines follow the revision of the provisions in the guidelines for foreign exchange trading issued in November 2014.

But despite the directives, the kwacha continues to lose ground against major foreign currencies and the end appears not in sight any time soon.

The currency, according to Blantyre-based Nico Asset Managers Limited, is expected to depreciate further in the short-term albeit slightly slower than the recent depreciation as the lean season approaches and donors continue to withhold budgetary support.

The country has traditionally relied on exports and donor aid for foreign exchange inflows.

And with tobacco sales facing turbulences in recent years, coupled with a thin export base, sources of foreign currency these days appear bleak.

Total tobacco revenues for this year, slightly estimated above $300 million mark, are way below the set target of $350 million, not enough to satisfy the queue for foreign currency.

Economic experts such as Gilbert Kachamba of Catholic University also vehemently fear that with the weak kwacha in place, things will be tougher ahead for most Malawians, especially the poor as importers and traders pass on the high cost of imports to the consumer.

 

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