Kwacha auction pegs dollar rate at K1063
Results of the foreign exchange auction held on Monday left the Reserve Bank of Malawi (RBM) and authorised dealer banks (ADBs) with a K1 063.86 dollar exchange rate effective today, up from K1 036.
But the nearly 40 percent spread between the official central bank exchange rate and the cash rate, also known as telegraphic transfer (TT), shows just how, in reality, the market and monetary authorities are miles apart on the real value of the local currency.
Currently, the kwacha is trading at an average of K1 550 in ADBs against K1 063.86, which is the daily foreign exchange bureau rate published by the RBM.
While results of the auction show that all the eight ADBs participated in the auction, sources in the banking sector confided that banks are still taking a cautious approach to assess the strength of the local unit.
However, in a letter addressed to the ADBs yesterday, RBM Governor Wilson Banda described the auction as successful given the full participation from banks.
He said going forward, the auctions will determine the market clearing price of the kwacha against the dollar and other major currencies.
Weighing in on the auction, economist Edward Chilima, while indicating that the development is good, said the existing mismatch between official ADBs rates and the parallel market rate is of concern.
In an interview last evening, he said: “This [ADBs rate] is where the official market is according to the ADBs. However, most transactions are being done outside the official ADBs rates, especially the cash transactions. In bureaus and the parallel market, for instance, the rates are way above that as such we remain keen to this gap being narrowed.”
A dealer with an ADB confided in The Nation yesterday that most banks were bidding to contain the price, saying without any injections, the objective of such actions will not be achieved.
However, the Financial Market Dealers Association of Malawi (Fimda) observed that the results reflected the market sentiment.
Fimda president Leslie Fatch in an interview said: “The intention by the authorities was to align the rates hence the outcome where the rate has now moved in line with the auction results.
“As a dealing community we have advocated for a rate that is responsive to market forces so the auction approach supports that. We hope the approach will yield the intended objective.”
RBM announced in January this year 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.
During the Monday auction, the ADBs offered $450 000, but RBM accepted $350 000.
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.
