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Chuka reflects on kwacha fall in 2015

 

Reserve Bank of Malawi (RBM) Governor Charles Chuka has said the fluctuation of the kwacha in 2015 against major international currencies, particularly the dollar, was worse compared to the experience the year before.

The governor—in the third monetary policy statement released on Friday—said the situation was exacerbated by panic buying of foreign exchange by commercial banks as they replenished their stock which they had earlier sold to the market before the onset of the tobacco selling season.

Inflation performance projections for 2016
Inflation performance projections for 2016

Chuka also blamed the fluctuation on excess pressure resulting from panic payment of bills by importers to take advantage of the relatively lower value of the dollar on the market.

“It is worth noting that the fluctuations in the exchange rate have been relatively higher this year compared to experiences of 2014,” he said.

Chuka also noted that the recent spate of kwacha depreciation largely reflected the strengthening of the dollar—the world’s reserve currency—and other major currencies on the international market.

Worse still, Chuka said foreign currency denominated account (FCDA) holders also clung to their foreign currency to make profit, hence contributing to earlier than expected exchange rate depreciation and increased exchange rate volatility.

Ironically, the volatility of the local unit last year came at a time RBM had gross official import cover of more than three months, which is internationally recommended to ensure importation of critical goods such as medical drugs, fuel and fertiliser.

During the year, RBM also supported the market through sales of its foreign exchange to commercial banks.

“The buildup in gross official reserves gave monetary authorities more flexibility to intervene in the foreign exchange market in order to absorb adverse shocks,” said Chuka.

RBM figures showed that the kwacha remained relatively stable for the most part of the second quarter (April to June) of 2015, but sharply depreciated at the beginning of the third quarter.

In August, November and December 2015, the exchange rate recorded monthly depreciations of 8.7 percent, 8.1 percent and 9.8 percent respectively.

There was a minor stability in September and October 2015 when the exchange rate appreciated by 0.5 percent and thereafter depreciated by 0.8 percent, according to RBM.

Commenting on the impact of kwacha fall in 2015, Small and Medium Enterprises Association (Smea) president James Chiutsi said the development had adverse affects on the growth of small businesses.

From a large-scale perspective, Malawi Confederation of Chambers of Commerce and Industry (MCCCI) president Newton Kambala said panic buying on the foreign exchange market was largely a result of expectations and speculations within the market.

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