Low forex demand to spur kwacha

Nico Asset Managers, a portfolio and investment advisory firm, has projected that the local currency is bound to appreciate further on account of continued low demand for foreign exchange and the trickling in of tobacco dollars beginning next week.

The Blantyre-based firm, in its latest monthly economic analysis, has however, cautioned that the local currency risks increase speculations which it says will impact on the currency.

“The exchange rate is expected to continue appreciating once proceeds from the tobacco season start to pour into the country,” reads the firm’s analysis in part.

The 2014 tobacco market is expected to open Monday next week with optimism from industry experts that the season is bound to benefit the economy through expected increase in revenue and improved prices per kilogramme than last year.

Apart from tobacco-which earns the country an average of 60 percent of all export earnings-Malawi also leans heavily on external aid in form of budget support as a source of foreign exchange but at the moment most of Malawi’s major donors are still withholding their support since November last year following the revelations of abuse of enormous taxpayers’ money popularly christened Cashgate.

But despite the donors still tightly holding on to $150 million, in budget support the kwacha is still gaining strength to major foreign reference currencies notably the dollar, a situation experts say is due to the shrinking demand for foreign exchange and not due to the availability of foreign exchange.

“According to media reports, demand for fuel had gone down as a result of the increased fuel prices. This means the kwacha is appreciating due to a reduction in imports compared to the actual supply of forex at the moment,” says Nico Asset Managers.

During the month of February, the firm calculates that the kwacha recorded a 2.9 percent appreciation against the dollar, a 2.1 percent appreciation against the British pound, a 2.7 percent depreciation against the South African Rand and an appreciation of 2.5 percent against the Euro.

It says the Common Approach to Budget Support (Cabs) has postponed their bi-annual review meeting which was scheduled for March 11 2014 saying if targets were met may have resulted in donor aid being unlocked.

“This means that the country can only rely on tobacco proceeds to ease the pressure on the currency in the short-term.”

Currently, the country is still receiving foreign exchange inflows through exports other than tobacco and some aid inflows that are coming in directly to support the different sectors such as the health sector estimated between $40 million and $70 million.

Last month, Finance Minister Maxwell Mkwezalamba said the domestic economy was healing from the severe Cashgate impact citing falling interest rates, an appreciating currency and falling Treasury Bill rates.