Malawi continues to grapple with the scarcity of foreign exchange despite efforts to rebuild its international reserves to reduce external vulnerabilities.
Among others, the Reserve Bank of Malawi (RBM) devalued the kwacha by 44 percent in November 2023 as a condition for the Malawi Government to clinch a four-year $175 million (about K306.4 billion) International Monetary Fund (IMF) Extended Credit Facility (ECF) programme.
RBM was expected to allow greater flexibility in the exchange rate to reduce foreign exchange shortages, facilitate easier accumulation of international reserves and improve trading conditions in the interbank market.
The central bank was expected to increase its purchases of forex and refrain from interventions until the level of international reserves reaches at least four months of import cover.
However, RBM still struggles to rebuild its international reserves, a situation which has left dire consequences for businesses and the economy at large.
But, as Malawi Confederation of Chambers of Commerce and Industry (MCCCI) concedes, scarcity of foreign exchange poses “significant” risk to the domestic economy that limits the country’s potential for growth this year.
Reads the economic review: “Forex scarcity still remains the key challenge evidenced by a lower than required import cover and a growing spread between the official and the parallel markets.”
MCCCI observes that while the IMF initiative is a stamp of approval for Malawi’s commitment to creating a conducive business environment, and that there is an expectation of increased foreign direct investment following the ECF, this intervention will take time to manifest.
“We, therefore, should expect some of the macroeconomic fundamentals to be unfavourable for an extended period.”
Following the devaluation, the kwacha weakened from K1 700 to K1 751 against the dollar.
Since January 2024, RBM has been conducting foreign exchange auctions aimed at determining the prevailing market clearing price of the kwacha against the dollar and other major currencies.
The current official rate is, therefore, based on the results of the auction conducted in the course of the year.
However, in the face of low foreign-exchange liquidity, the spread between the official and parallel exchange, which had narrowed from 60 percent to about 10 percent at end-April, has started to widen again.
While the official rate is hovering around K1 751 in authorised dealer banks, on the parallel market the dollar is trading at around K2 900.
Financial Market Dealers Association president Leslie Fatch said the current situation is providing an incentive to use the informal market, where the promise of an informal and unregulated market might be too hard to resist.
He said as the parallel market flourishes, the resultant forex scarcity on the formal market affects the effectiveness of formal channels.
Cross Border Traders Association of Malawi president Steve Yohane observed that businesses are no longer stable in the face of forex shortage.
He said following the devaluation, which has led to an increase in prices of goods and services by over 50 percent, consumers prioritise buying essentials, thereby taking out non-essential selling small businesses out of business equation.
Said Yohane: “It’s too hectic, things will go up including transport and most small-scale cross-border traders will not manage to do business.”
On his part, Chamber for Small and Medium Enterprises executive secretary James Chiutsi said with cross-border MSMEs largely surviving on currency exchange in doing trade, shortage of currencies in the banks is an automatic fall down of businesses.
“Few forex on the market is hugely controlled by the government for essential commodities only,” he said.
Consumers Association of Malawi executive director John Kapito feels that as a net importer, Malawian consumers will continue to pay heavily for the forex shortages.
He said: “We have witnessed the worst shortages of forex on the market which has contributed to the ever rising high cost of living which continues to hurt poor consumers when they were promised that ECF will improve the economic conditions within the medium-term.
“Unfortunately, it has become a nightmare.”
RBM spokesperson Mark Lungu said apart from forex auctions, which is one of the reforms agreed to determine the correct exchange rate on the market, the central bank has been implementing a number of initiatives including the intensity in export proceeds reconciliation.
Meanwhile, to strengthen the country’s dwindling foreign exchange reserves, the Ministry of Finance and Economic Affairs has published a Malawi Government Gazette dated December 13 2024 requiring public institutions to open foreign currency-denominated accounts at the RBM.
The institutions will also be required to convert 80 percent of their foreign currency receipts into kwacha while non-governmental organisations are expected to convert 70 percent of their forex receipts into the local currency.
According to a notice published in the Malawi Government Gazette, signed by Minister of Finance and Economic Affairs Simplex Chithyola-Banda, the bank shall, upon receipt of a credit as funding in a foreign currency-denominated account, apply a mandatory conversion or retention ratio of 80 percent of the total funding at the official buying exchange rate published by the bank while retaining the remaining 20 percent in the foreign currency-denominated account.
