Forex market disparities widen
Financial Market Dealers Association Dealers (Fimda) says taming the widening gap in the foreign exchange market will not be an easy task unless demand and supply challenges are addressed.
Fimda president Leslie Fatch said this in view of the growing misalignments in the foreign exchange market after the forex auctions held by the Reserve Bank of Malawi (RBM) to determine the market clearing price of the kwacha against the dollar and other major currencies.
Presently, the kwacha is trading at an average of K1 063 in authorised dealer banks (ADBs) against the K1 600 daily foreign exchange bureau rate published by the RBM.
On the parallel market, the kwacha is now trading between K1700 and K1800 to the dollar, further widening the existing gap that was there between the official and parallel market rates to between K600 and K700.
Fatch, in a written response on the forex situation, observed that the fact that demand continues to outweigh supply in the market, continued pressure on the currency and a wide gap in the forex market will continue.
He said: “The challenges with forex in Malawi are structural; hence, solutions cannot be overnight. So, as long as demand outweighs supply, the kwacha will continue to be under pressure, hence the misalignment.
“In a free floating market, that would end in a steep depreciation. In our case, especially with the formal market rate being regulated, it is the black market that will respond elastically to those demand and supply forces. To make it worse, such shortages will invite speculation and panic buying.”
As one way of closing the gap between official and parallel market rates and promoting transparency in the determination of the exchange rate, RBM announced earlier this year that it would hold periodic forex auctions.
Meanwhile, results for the second auction held on June 19 2023 show that some banks bid K1 137.89 for the kwacha but RBM settled for K1 063. The country’s eight banks participated in the auction.
Market analyst Bond Mtembezeka observed that from the auction results one can tell that banks simply did not want to overprice their bids because they were dealing with RBM.
He said: “The reality is, however, that given enough room, they can bid highly to reflect the reality on the ground. The mismatch in the market is so strong and this is why we have the wide disparity between the official exchange rate and the exchange rate on the market.”
Meanwhile, RBM deputy governor William Matambo admitted that the central bank does not have resources to regulate the value of forex on the black market which is currently soaring.
He told The Nation last week that it has become hard for the central bank to have an impact on the rising rate of the dollar on the black market.
“With the situation, we are in it is not very easy for us to reign in on the black market because that requires you to have adequate reserves,” he said.
