The Malawi kwacha, basking in the glory of appreciation beginning April, is bound to depreciate unless the economy realises additional stable and significant sources of foreign exchange.
Nico Asset Managers Limited, in its monthly economic report for May 2013, explained that sustainability of the value of the kwacha will be critical, particularly after the sales of tobacco, which wires in half of the Malawi’s foreign exchange and contributes 13 percent to the national economy.
In the month, the local unit continued to appreciate against all the major currencies.
The kwacha registered an appreciation of 17 percent against the dollar to K329.15 from K396.72, 18.5 percent against the British pound to K501.36 from K614.91, a gain of 25.7 percent against the South African rand to K32.78 from K44.11.
The local currency also gained by 17.3 percent against the euro to K429.54 from K519.66, according to data from the Reserve Bank of Malawi (RBM).
“The ongoing proceeds from the tobacco market will continue to help stabilise the value of the currency in the short-run as supply of forex will increase, therefore reducing the relative price at which the foreign currency is acquired, thus an improvement in the rate of depreciation.
“The medium-term prospects, however, entail a possible depreciation of currency unless the economy realises additional stable and significant sources of forex,” said the investment advisory firm.
The Economist Intelligence Unit (EIU) forecast a significant 4.8 percent increase [from 2.5 percent reduction in previous year] in 2013 in exports against a two percent increase in imports [from a 1.1 percent reduction] which will also help stabilise the exchange rates as there will be a corresponding lower demand of forex and a corresponding higher supply of forex.
It said the forecast increase in foreign exchange reserves from $154 million in 2012 to $ 291 million this year will also help stabilise the exchange rate.
Economic analysts already warned that the kwacha appreciation could be short-lived predicting that it will be under immense pressure when the country starts importing agricultural inputs, particularly fertiliser.
The kwacha had, since May 2012 when it was devalued by 49 percent and let loose to trade according to the dictates of the market, fuelling a rise in inflation which peaked at 38 percent, turned the corner in early April this year.
But if the kwacha starts to weaken again, it will have disastrous repercussions to individuals, businesses and the economy as a whole.
A weak kwacha has the potential to increase external liabilities for companies that have foreign currency liabilities on their balance sheet.
It could also result in soaring inflation thus reducing disposable income and increasing the cost of capital as authorities increase interest rates to contain the rising inflation.
Depreciation of the kwacha reduces the demand for foreign exchange resulting in increased foreign currency reserves.
On the other hand, appreciation of the kwacha, as has been observed, results in reduced prices of goods and services.
