Kwacha under pressure as reserves dwindle

The Malawi kwacha, severely battered by a nearly 50 percent devaluation and its subsequent floatation in May, will weaken further owing to dwindling foreign currency reserves to anchor it.

Financial Market Dealers Association (Fimda) president Lusekelo Kaoloka has since called for market intervention by way of injection of foreign currency to stabilise the fluctuating local unit.

This would not be the first time for market intervention since the Reserve Bank of Malawi (RBM) devalued the kwacha in May.

Analysts say immediately after the shock devaluation, the market had no foreign exchange to support the monetary policy stance and the RBM injected a substantial amount of forex to assure the market.

“That worked at that time, but having been utilised for imports immediately, there was need to sustain this to prevent a runaway depreciation,” suggested Kaoloka, in an e-mailed response to a Business News questionnaire on Tuesday.

She added that, as financial market dealers, they have always agreed that the liberalised exchange rate system is not the only solution to the country’s foreign currency woes.

Since RBM devalued the local unit and adopted a liberalised exchange rate regime on May 7, the kwacha has dipped by more than 64 percent in authorised dealers banks (ADBs) and is currently trading at around K284 to a dollar.

On the parallel or black market in Blantyre, the kwacha is now selling at between K300 and K320 depending on demand, a loss of between 70 percent and 80 percent against a dollar.

The hugely depreciated rate on the black market could be an indication that foreign currency is indeed in short supply since traders deal in cash only.

But Kaoloka on Tuesday noted that, as dealers, they are not surprised with the further depreciation of the kwacha, arguing it is indicative of huge demand for foreign currency on the market against few supplies.

“With the closure of the tobacco market, it is key that there must be some intervention. This could be by inflow from other stakeholders or from the RBM by injecting forex into the market or there could be a possibility that few forex supply could lead to further loss of kwacha,” warned Kaoloka on Tuesday.

Malawi’s tobacco market season this year has not been impressive on the basis of the proceeds realised which have dropped by 40 percent to $176.8 million from last year’s $293 million, according to preliminary figures from the Tobacco Control Commission (TCC), a clear indication that foreign currency reserves will be under pressure.

The Malawi economy has over the years heavily relied on foreign exchange generated from the sales of tobacco which brings in about 60 percent of all the country’s forex proceeds, apart from what the country realises from other crops, remittances from Malawians in diaspora and what it receives from its bilateral donors.

Figures from the RBM show that as at August 10, gross official reserves held by the central bank amounted to $199 million, an equivalent of 1.54 months of imports.

Adding on to the private sector reserves with the commercial banks at $231 million or 1.79 months of import, this then means that the economy is sitting on $430 million of reserves.

The increase in private sector reserves is on the account of a directive from RBM that all foreign currency realised from the sales of tobacco should be routed through commercial banks.

But investment and portfolio managers, Blantyre-based Alliance Capital Limited said in their weekly market commentary that the demand for forex is likely to pick as government and business gear up for the next season’s import of agricultural inputs.

“This will inevitably put stress on the reserves, but we remain hopeful that pledged donor, bilateral and multilateral support will cushion the country from the potential shocks,” said the firm.

Malawi usually uses most of it foreign currency to procure essential imports such as fuel, fertiliser and medical drugs, among others.

The import bill for fuel alone was recorded at $34 million per month as the end of 2011, and the figure may have gone up owing to fuel global price increase over the past months.