The Malawi kwacha has come under renewed pressure, weakening against the euro, pound and South African rand, but has remained relatively stable against the dollar, a new report has shown.
Economic analysts say this raises fresh concerns about the local unit’s stability at a time foreign exchange continues to be scarce, with foreign exchange reserves hovering at below two months of import cover, way below the recommended three months’ threshold.
Data from the Reserve Bank of Malawi (RBM) show that during the review period, the kwacha dropped two percent against the euro, 1.4 percent to the pound, two percent against the rand, but remained steady against the dollar.
But despite this stability against the dollar, RBM noted that the spread between the kwacha-dollar telegraphic transfer rate and the bureau cash rate widened slightly, a situation that signifies persistent pressure on the market.
Reads part of the RBM report: “The local currency depreciated against most currencies of the country’s major trading partners except against the Zambian kwacha and the Indian rupee.
“Specifically, the kwacha remained generally stable against the dollar, closing the month at K1 749.95 per dollar. However, the kwacha lost value by 1.4 percent and two percent against the British pound and the euro, respectively.”
The report said the British pound strengthened supported by softer-than-expected economic figures from the US, which weighed on the dollar.
Meanwhile, the euro experienced significant gains fuelled by uncertainty surrounding the US monetary policy as investors sought relative stability in the eurozone amid rising dollar volatility.
“Within the Southern African Development Community region, the kwacha depreciated by two percent against the rand,” reads the report.
The South African rand’s strength over the period was supported by a combination of domestic and global factors, including a weaker dollar and improved investor sentiment in the economy.
In an interview on Sunday, Financial Market Dealers Association president Leslie Fatch said the movement of the local unit against the other currencies is a function of how those respective currencies are trading against the dollar.
He attributed the weakening of the dollar against the pound and euro to US government shutdown.
Said Fatch: “The recent US government shutdown has seen the dollar weakening against these currencies, which in turn means these currencies have been trading on a stronger footing against the kwacha as has been reported.”
In its Country Report for Malawi, the International Monetary Fund observed that the kwacha official exchange rate at K1 751 against the dollar is overvalued, thereby creating distortions across the real economy.
Reads the IMF report: “Malawi’s de jure exchange rate regime is floating supported by inflation targeting, but the RBM de facto operates a stabilise” exchange rate regime.”
The report indicated that this, coupled with elevated money growth and foreign exchange scarcity, has increased activity in the parallel foreign exchange market and a growing spread to the official rate, peaking at over 150 percent earlier this year.
In an interview, economic consultant Booker Matemvu said the shift in the movement of the kwacha against major foreign currencies reflects both global and domestic factors.
He said: “The dollar is under pressure globally while the kwacha is also struggling.
“The net effect is a façade of stability, but the true value on the parallel market shows that the fall continues.”
Matemvu cautioned that the currency market could remain volatile as long as foreign exchange supply remains constrained.
In its Mid-Year Economic Review, Nico Asset Managers Limited said persistent shortages of foreign exchange and speculative pressures continue to cause the disparity between official and parallel exchange rates to widen.
The report indicated that much of the country’s foreign currency inflows in the first half of the year were used to settle overdue payments for essential imports such as fuel, fertiliser and pharmaceuticals, leaving the country with low reserves.
“This underscores Malawi’s continued vulnerability to external shocks and the urgent need to diversify exports and strengthen fiscal resilience a,” reads the report in part.
