Forex market liquidity tight
Foreign exchange market liquidity remains tight with demand outpacing supply, thereby putting pressures on the local currency, Business News has learnt.
Following the 44 percent kwacha depreciation, the official kwacha exchange rate for telegraphic transfer (TT), through which most foreign exchange transactions are conducted, moved from K1 080 to K1 700.
Resultantly, foreign exchange bureau rates are high as K2 070 against against the dollar while on the parallel market, the dollar was fetching as high as K2 700.
Before the devaluation on November 9 2023, the kwacha was selling at an average of K1 800 in foreign exchange bureaus cash exchange rates and an average of K2 400 on the parallel market.
Speaking in an interview yesterday, money market analyst Bond Mtembezeka observed that this reflects the pressures that market forces are exerting on the market.
“It is not a normal trend per se, but it was expected,” he said.
On his part, money market analyst Cosmas Chigwe said this is because the central bank has authorised banks to negotiate rates with buyers and sellers freely.
He said while this will assist in price discovery and likely lead to further depreciation in the short-term, the fact that initial indications are that the black market rate is also going up entails the kwacha is yet to find its true price.
Said Chigwe: “But ultimately, this is an overall good direction for the country as effectively, the authorities were subsidising imports at the semi-fixed, lower exchange rates. It, therefore, remains to be seen if the K1 700 will hold for long.”
“As long as the current rates are not anchored by improved foreign exchange supply, then the formal rate will continue to chase the black market rate.”
Meanwhile, IMF data shows that readily available gross international reserves have remained low, at $156.1 million in end-September 2023, only a small accumulation from $120 million at the end of 2022.
Following the devaluation, RBM gave permission to authorised dealer banks to freely negotiate exchange rates to trade with the clients and among themselves, notwithstanding any limitations previously in place.
The central bank also announced that it will hold foreign exchange auctions every two week, which it has been using for price discovery since January this yea from the monthly cycle.
The RBM said forex sales will take place only as necessary to address disorderly market conditions.
The measures were meant to strengthen the forex market.
RBM spokesperson Mark Lungu said that more flexibility will allow the exchange rate to be determined by the market, adding that the currency adjustment was done to correct the misalignment that resulted from supply shortages in the market.
Malawi needs $250 million (about K425 billion) monthly to meet its import requirements, translating to $3 billion (about K5.1 trillion) per annum against imports valued at $1 billion about K1.7 trillion), creating a negative trade balance.
