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Forex crisis worsens post-devaluation

The Reserve Bank of Malawi (RBM) decision to devalue the kwacha by 25 percent to boost supply in the formal market seems to have had little or no impact as the spread between parallel and official rates continues to widen, figures show.

The kwacha is trading at an average of K1 300 in most authorised dealer banks (ADBs) against the official K1 036 daily foreign exchange bureau rates published by the RBM, creating a spread of about K264.

The prevailing spread, which comes four months after the devaluation of the kwacha on May 27 2022, a move the central bank said was necessary to align forex supply to macroeconomic fundamentals and ensure supply in the formal market, is a pointer to the pressure on the kwacha as demand for foreign currency surges against available supply, analysts have said.

Spot-checks Business News conducted this week revealed that the parallel market rates were even higher than those in foreign exchange bureaus where the local unit was at around K1 420 to the dollar.

Our analysis also extended to the foreign exchange bureaus where, for example, at Victoria Forex Bureau, a dollar was selling at K1 290 against the official K1 036 daily foreign exchange bureau rates published by the RBM.

The wider spread was also noticed at FDH Money Bureau Limited where a dollar was fetching K1 302 to a dollar against the official K1 036.

Financial Dealers Association of Malawi (Fimda) vice-president Jim Kalua yesterday acknowledged the disparities between the parallel market and the bank exchange rates, saying the move signals that there is high demand as compared to supply for the cash.

He said: “After the devaluation, there was supposed to be at least a big injection in the market and that could have at least eased this pressure. At the moment, we are in a fix as reserves are too low and sitting on a huge backlog.

“As an economy, we cannot operate without essential commodities like fuel, pharmaceuticals and fertiliser but as much as RBM has put measures to normalise this, the measures have done little to curb the problem.”

Speaking separately, market analyst Bond Mtembezeka said usually, the parallel market and foreign exchange bureau rates reflect the true interplay between demand and supply of foreign currency on the market.

He said: “This shows that the scarcity of forex is a real issue which is driving up the exchange rate. When economic agents have a hard time accessing forex on the formal markets they resort to the parallel market and if the exchange rate on the parallel market is rising, it speaks volumes of the demand on it is high which is a direct indication that economic agents are finding a hard time accessing forex on formal markets

“The devaluation was ideally supposed to narrow that spread because with the devaluation, we expected economic agents that had forex positions to offload some of those positions but that did not happen to the level we anticipated and, therefore, the devaluation has only worsened the spreads.”

Economist Exley Silumbu, University of Malawi, also observed that devaluation has done little to tame the supply and demand imbalances.

“What we are seeing here is that the devaluation was really not the answer as the situation has compounded even after the move. In the absence of an International Monetary Fund [IMF] programme, we see the forex problem worsening,” he said.

The central bank, however, insisted that benefits from the devaluation have not fully manifested in the economy, saying speculations on the future direction of the exchange rate is what is putting pressure on the exchange rate.

“RBM believes that the current pressure on the exchange rate is fuelled by speculations and, therefore, not reflective of true demand and supply dynamics,” said RBM Governor Wilson in a statement last month.

RBM devalued the local unit by 25 percent in May this year amidst a crippling shortage of foreign exchange.

The bank justified the move, saying it aimed to realign the exchange rate with economic fundamentals.

Then, 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.

Presently, the gross official reserves under the direct control of the RBM have continued to fall, reported at $378.89 which is an equivalent of 1.52 months of import cover in August 2022, from $604.50 which is an equivalent of 2.42 months of import cover in August 2021, according to RBM’s Financial Markets Development Report.

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