EIU says kwacha still overvalued
The Economist Intelligence Unit (EIU) says the kwacha is still overvalued and will depreciate further against the dollar to trade at K1 224 by December this year as chronic current account deficits persist.
The kwacha, which is currently trading at K1 036 to a dollar, was devalued by 25 percent on May 27 this year, in a move the central bank said was necessary to align the foreign exchange supply to the macroeconomic fundamentals as well as ensure supply of foreign exchange in the formal market.
In its forecast for Malawi, the EIU said the kwacha is expected to be undermined by a large current account deficit this year with high volatility expected in 2023 owing to the probable transition to a less interventionist exchange rate regime.
The EIU, a firm within the Economist Group of the United Kingdom which provides forecasting and advisory services, said the kwacha remains overvalued due to a less than sufficient devaluation in May.
The firm said the kwacha traded at about K817 to the dollar before the devaluation and remained weak in August at about K1 026.41 to the dollar.
Reads the report in part: “The kwacha regularly comes under pressure, which has been exacerbated by high global commodity prices.
“As a result, foreign exchange has continuously been in short supply, leading to shortages of key commodities like oil in the country.”
The EIU further said lower-than-expected agricultural production as a result of the tropical cyclones that hit Malawi at the beginning of the year and the lower-than-expected outturn of the tobacco auction floors has exacerbated the foreign exchange supply problem caused by a weak export base.
But speaking in an interview on Saturday, RBM Governor Wilson Banda could not indicate whether the kwacha has reached an equilibrium or not, but maintained that the local unit has stabilised.
He said: “We want to assure the nation that there is stability in the market. Has it reached an equilibrium? This depends and clearly we cannot say anything on this because we do not want to speculate.
“All we can say and assure the nation is that we are watching this space carefully and doing all we can to balance the forex supply and demand.”
Market and economic analyst Bond Mtembekeza is quoted as having said that if nothing radical is be done, the kwacha’s continued fall is inevitable, a situation which will have an impact on inflation and general economic growth.
He said a depreciated exchange rate brings about imported inflation.
“Considering that Malawi predominantly imports its raw materials for production and manufacturing, a depreciated exchange makes these raw materials expensive and, therefore, producers don’t import as much and production declines which affects economic output and growth,” he said.
Financial Market Dealers Association of Malawi vice-president Jim Kalua said the country is in an awkward situation with import cover sitting below recommended three months.
RBM devalued the local unit in May this year amid a critical shortage of foreign exchange.
Before the devaluation, the imbalances between supply and demand had been prevalent on the domestic foreign exchange market evidenced by low foreign exchange supply, declining official foreign reserves and widening spread of rates on the market.
Meanwhile, gross official reserves under the direct control of the RBM dropped to $378.89 million, an equivalent of 1.52 months of import cover at the end of August 2022 from $604.5 million, an equivalent of 2.42 months of import cover in August 2021, according to RBM Financial Markets Development Report. n
