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Home Business Business News

Forex drought hits banks hard

by Dumbani Mzale
26/08/2020
in Business News, Editors Pick
4 min read
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Foreign exchange shortages in  Authorised Dealer Banks (ADBs) are forcing commercial banks to ration the hard cash, The Nation has established.

Market analysts say the surge in demand for foreign currency has also fuelled depreciation of the local currency on the official market.

Foreign exchange such as dollars are said to be in short supply

As of Tuesday, the kwacha was selling at around K756 against the dollar from a ‘stable’ selling price of around K749 for over three years, save for some spikes between May and June last year. The kwacha has depreciated by about K7 or 0.92 percent during this period.

This comes at a time the spread between the selling price of the dollar at K860 on the parallel market and K756 in most ADBs continues to widen, which points to massive pressure of the local currency.

While Bankers Association of Malawi president Kwanele Ngwenya has attributed the scarcity of foreign exchange (forex) and the subsequent pressure on the local currency to recent disruptions in the global supply chain and logistics, on one hand, money market analysts and financial experts we spoke to on Tuesday blamed authorities for artificially holding the kwacha at a time the currency is overvalued.

Critics also observed on Tuesday that the local currency was supposed to be let loose way back in 2018 as it had reached its equilibrium price then, adding that the previous administration used the exchange rate as a political tool.

As of Monday this week, gross official forex reserves, which are under the direct control of the Reserve Bank of Malawi (RBM), dropped to $651 million (about K488 billion), or 3.12 months of import cover, from  $847 million (about K630 billion), or 4.05 months of import cover, in December 2019 and $787 million (about K590 billion), or 3.76 months of import cove, in January 2020, according to a financial market development report by RBM dated August 24 2020.

On one hand, as at July 31 2020, figures show that all ADBs had cumulative foreign exchange of $770 000 (about K57 million), a drop from  $2.4 million (about K1.8 billion) in December 2018.

Figures show that in March, April, May and June 2020, all ADBs were in red, with the accumulated negative balances of $-4.56 million, $-3.09 million, $-4.50 million and $-0.98 million in that order.

In an interview on Tuesday, Ngwenya said the pressure being mounted on the forex was expected due to uncertainties before the elections as most clients wanted to front-load payment of their bills.

He said: “Supply of forex has also been affected by slowdown in business activity in the economy as projects have slowed dow

n and there have been logistical disruptions in most economies due to the pandemic.”

Ngwenya said the forex scarcity was created by speculation and the uncertainty preceding the elections, adding that the situation has lately been compounded by Covid-19.

“The marginal depreciation is happening across the economies. That is why you have noted that the rand has also depreciated against the dollar. Being a liberalised market, this is expected to happen,” he said.

But Alliance Capital Malawi Limited research manager Bond Mtembezeka said on Tuesday that the current scarcity of forex on the official market points to a situation where the kwacha-dollar exchange rate is artificially being held and that the local unit is overvalued at this point.

He explained: “All things being equal and with the flexible exchange rate regime we are in, we should have seen a massive depreciation of the kwacha and not these small changes we are seeing.

But Ben Kaluwa,  a professor of economics at Chancellor College—a constituent college of the University of Malawi—suspected that in the face of the current political situation, some desperate individuals could be busy externalising foreign currency; hence, putting more pressure on the kwacha, particularly on the black market.

He said currently there is rationing of foreign currency on the official market, which he said is a symptom of foreign exchange shortage.

RBM spokesperson Onelie Nkuna had not responded to our questionnaire as we went to press.  But in an earlier interview,  she said there is surging demand for foreign currency on the local market.

Financial Dealers Association of Malawi president Patricia Hamisi recently told The Nation that being an economy that has limited sources of forex supply and is operating under the floating rate regime, they expect authorities to intervene if they see the need to do so and in line with monetary and fiscal policies.

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