Parallel forex trade eases on floatation

Foreign currency trading on the black market in Malawi has dwindled largely because of the floatation of the kwacha which has made exchange rates in authorised dealer banks (ADBs) to be competitive.

Since the Reserve Bank of Malawi (RBM) devalued the local unit by 49 percent and subsequently floated it on May 7, the gap between exchange rate in ADBs and the once lucrative black market has narrowed.

As part of the foreign exchange reforms, the RBM also directed that all the foreign currency proceeds from tobacco, Malawi’s number one forex earner, should be sent to commercial banks, a development that has boosted reserves particularly for the private sector.

RBM figures show that in the week ending June 22, private sector reserves stood at $230 million (K58 billion), an equivalent of 1.78 months of import cover, a rise from $222 million (K56 billion), or about 1.72 months of import cover.

Comparatively, the official reserves held by the RBM stood at $89 million (K22 billion) during the same period, which is an equivalent of 0.68 months of import cover.

Import cover

Malawi requires the internationally recommended three months of import cover to satisfy its import needs.

An increase in the reserves of the private sector reflects the policy change of tobacco dollars going directly to commercial banks.

Since the floatation, the kwacha has further weakened from K250 per one US dollar to K280 in ADBs, representing a 12 percent drop.

On the black market in Blantyre and Lilongwe, the dollar is trading at around K290 from a peak of K320 at the height of the foreign exchange crisis, a decline of roughly nine percent as most people now turn to ADBs for their forex needs.

Analysts have said the local unit is gradually aligning itself to market forces, resulting in the black market trading subsiding.

A black market forex trader in Blantyre confirmed on Friday that since the kwacha was floated, they have observed reduced business in their foreign currency sales.

“We used to be overwhelmed with customers looking for US dollars and other currencies. That is no longer the case now. Business has gone down because our usual customers now prefer to trade in the banks,” said the trader who preferred anonymity because of the illegality of his trade.

He said trading in South African rands on the black market has almost ceased because the banks have adequate rands.

Money market

But analysts say the floatation of the local unit has a number of implications on the money market, foreign exchange bureaus and the stock market.

Acting manager at FDH Stockbrokers Limited, Nelson Mkwende, said in an interview on Tuesday that the money market stands to benefit because the floated kwacha, which is fluctuating, will trigger inflation.

This will in turn position the money market as an attractive investment avenue, with good interest rates.

“The fluctuation will, however, bring a sort of uncertainty on the same money market investments as investors will have to judge whether to consider the investment avenue as short, medium or long term, depending on the forecasts made,” said Mkwende.

He said theoretically, the forex bureaus also stand to benefit because of freedom of pricing of the currency.

However, Mkwende said the fluctuations may negatively affect the profit margins on some bureaus which do not promptly react to changes in the pricing of the dollar.

But he said the money market should look more attractive with rising interest rates as the kwacha fluctuates.

Lending rates

The base lending rate currently hovers around 25 percent on average from around 18 percent following two policy decisions from the Reserve Bank of Malawi: increasing the bank rate from 13 percent to 16 percent on May 11 and the introduction of a temporary discount window accommodation (DWA) on June 1 to help out stressed banks at a charge of 18.50 percent.

“Empirically, the stock market stands to be attractive, medium to long-term, even when there are attractive rates on the money market because when smoothen out over time, capital gains and dividend payments from stocks are considerably higher than the overall return from money markets, that is dependent on how the stocks are performing,” he said.

Analysts have said before the devaluation, the restrictions on foreign currency transactions created distortions which were boosting informal activity (black market) at the expense of the formal economy, with dire consequences for official sources of foreign exchange and government revenues.