First kwacha auction flops
The inaugural foreign exchange auction held on Friday received a lukewarm response as only three commercial banks submitted bids, prompting analysts to suggest that the banks are being cautious on the new arrangement.
Results of the auction released yesterday show that three out of the eight authorised dealer banks (ADBs) participated and Reserve Bank of Malawi (RBM) Governor Wilson Banda stated in a statement that the results cannot be used to determine the official exchange rate as they may not reflect the sentiments of the entire banking system
He said: “This being the first price discovery auction, the RBM duly noted and appreciated the rates submitted by the three banks and will continue engaging all other banks in preparation of the next auction.”
The development means there will not be any change in the pricing mechanism for foreign exchange as was anticipated, ultimately, the kwacha remains at K1 036 to the dollar.
However, the Financial Market Dealers Association of Malawi (Fimda) yesterday observed that being a new arrangement that is operating differently from the current set up, it is possible other banks are taking a wait-and-see approach.
Fimda president Leslie Fatch was, however, quick to say that given that the arrangement is new, it was not expected to take off at once.
He said: “We must understand that the auctions were not mandatory and banks were to bid according to first their sources of forex and secondly, the prices they see the currency to be worth.
“This could suggest banks that did not participate had no supply of forex or they are not willing to take a risk on the price considering they do not really hold the commodity themselves.”
Market analyst Bond Mtembezeka also observed in a separate interview that banks could simply be taking a cautious approach to try to understand what the real implications of these auctions.
“Generally, it is not clear as to what RBM is trying to achieve by this. Going forward, we see RBM engaging in moral suasion in a bid to get all banks to participate but the most important thing to consider is the real motive behind and the implication of such auctions,” he said.
Catholic University head of economics department Hopkins Kawaye observed that the development is indicative that there is no forex in the banking sector.
“If banks had excess forex they would simply sell it to the RBM at a profit of course but the silence is an indication they are in short supply.
“On the other hand, the development could also mean that banks were not given enough time to weigh their options on whether to participate in the auctions or not,” he said.
One bank confided in The Nation yesterday that banks were unable to participate in the auction because they are in short supply on the forex.
Said the banker: “The fact is banks are in a fix for they have to balance between selling the little they have to RBM and settling customers’ bills.”
RBM announced last week that the auctions would be held periodically and were meant to facilitate the discovery of a prevailing market-clearing exchange rate for the kwacha against major currencies, thereby promoting transparency in the determination of the exchange rate.
It further said the auctions would be done at prices freely determined by each of the participating ADBs with bids set at a minimum of $50 000 and in multiples of $10 000 thereafter.
Meanwhile, Banda has indicated that the RBM remains committed to pursuing a market determined exchange rate that is derived from the market driven price discovery process.
The kwacha was last devalued by 25 percent in May 2022, a move the central bank said was meant to align the foreign exchange supply to the macroeconomic fundamentals.
Nonetheless, supply and demand imbalances have 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.
