EIU foresees kwacha depreciating further
The Economist Intelligence Unit (EIU), a research and analysis division of the Economist Group, says the kwacha is expected to depreciate further until it catches the spread between the formal and informal market exchange rates.
In its analysis quoted in the Nico Asset Managers Monthly Economic Report for February 2024, the firm says bi-monthly exchange rate auctions the Reserve Bank of Malawi (RBM) holds with authorised dealer banks will gradually shift towards a market-led exchange rate.
The EIU further forecasts that the currency will continue falling until it reaches its equilibrium of K2 480 to dollar in 2028.
Reads the report in part: “As a result, the spread between the formal exchange rate at K1 751 to a dollar and the informal market exchange rate of K2 090 to a dollar continues to narrow.
“Liquidity has compelled the RBM to shift towards flexibility which is expected to allow the kwacha to gradually reach its fair value. The currency is expected to depreciate further to better reflect demand and supply.”
Commenting on the EIU forecast, Financial Market Dealers Association of Malawi president Leslie Fatch said on Wednesday that the recent three percent depreciation of the kwacha signals continued pressure on the local unit due to a backlog on import bills coupled with the limited foreign exchange supply.
He said the bi-monthly foreign exchange auctions are a sustainable tool of aligning the kwacha with the market forces.
Said Fatch: “We have to highlight that the introduction of the forex auctions provide a mechanism for flexibility which would allow the exchange rate to move in response to market forces.
“In the event that supply is lower than demand, we would see the rate depreciating while in the event that the supply happens to outweigh demand, the mechanism allows for the exchange rate to appreciate.”
In separate interview, Economics Association of Malawi acting president Bertha Bangara-Chikadza said the projected direction of the kwacha will exert extra pressure on inflation considering that Malawi is a net importer.
She said: “As a predominantly importing country, depreciation exacerbates imported or cost push inflation.
“As a result, despite easing food prices, non-food inflation may dampen the inflation outlook in the near-term.”
Meanwhile, the EIU has warned that the continued depreciation of the kwacha will increase business costs by making imports of raw materials and capital goods more expensive in addition to making businesses’ external obligations unbearable to settlers.
