Kwacha stability critical
The Malawi kwacha, which has somewhat stabilised in July thanks to tobacco and donor inflows, marginally lost value against all major trading currencies in June, figures have shown.
But Nico Asset Managers Limited economic report for June 2013 believes the sustainability of the value of the kwacha will be critical particularly after the sales of tobacco, the country’s principal foreign exchange earner wiring more than half of foreign exchange earnings, end in August.
“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,” says the investment advisory firm in its monthly report.
According to data from Auction Holdings Limited (AHL), in 18 weeks of tobacco sales, the country has raked in $296 million (K103 billion) out of 139 million kilogrammes (kg) of the leaf sold with only 23 million kg remaining.
In June, according to figures from the Reserve Bank of Malawi (RBM), the local unit depreciated by 1.9 percent against the dollar to K335.52 from K329.15, a 2.1 percent easing against the pound to K511.97 from K501.36.
The kwacha also lost value by 2.9 percent against the rand to K33.74 from K32.78 and depreciated by 1.8 percent against the euro to K437.45 from K429.54.
At the end of June, foreign exchange reserves were at $745 million, an equivalent of 3.98 months worth of import cover, beating the internationally recommended three months, from $580 million the month before, representing 2.31 months worth of import cover.
Of the total reserves, the RBM was sitting with $468 million, 2.49 months of import cover with the remaining 2.49 million held by the commercial banks, indicating that the central bank has accumulated reserves to support the local currency during the lean period.
This year, the kwacha is expected to be supported by the increase in export earnings.
The Economist Intelligence Unit (EIU) has forecast a marked increase of 4.8 percent [from a reduction of 2.5 percent] in exports in 2013 against a 2.0 percent increase in imports [from a 1.1 percent reduction] which will help to stabilised exchange rate.
The EIU also expects that there will be corresponding lower demand of foreign exchange and a resultant higher supply of foreign exchange in the year.
Also, the forecast increase in foreign exchange reserves from $154 million in 2012 to $ 291 million this year will also help stabilise the exchange rate, according to the economic think-tank.
The RBM last year revised upward the import cover to $188.1 million from $129 million, indicating the country’s increase in imports.
Analysts say a stable exchange rate increases price transparency enabling businesses and households to better compare prices of goods and services without the distorting effects of high exchange rate volatility.
On the other hand, a weakening currency increases external liabilities for companies that have foreign currency liabilities on their balance sheet whilst a more stable exchange rate boosts the ability for companies to better plan their various expenditures and expected costs.
