Pressure mounts on kwacha, falls by 3%

 The kwacha has weakened by three percent following a foreign exchange auction the Reserve Bank of Malawi (RBM) conducted on Monday, a move financial market dealers say signals continued pressure on the local unit.

This is the first drop of the kwacha since it was devalued by 44 percent last November, a development that sent shock waves in the economy, resulting in skyrocketing prices of goods and services.

Following the auction, the kwacha is now selling at a minimum price of K1 751 against the dollar form K1 700.

In a communication to authorised dealer banks dated March 19 2024 signed by RBM Governor Wilson Banda, the central bank said the forex auction in which four banks participated was successful.

Reacting to the depreciation on Wednesday, Financial Market Dealers Association of Malawi president Leslie Fatch said the move signals continued pressure on the kwacha due to the backlog on import bills coupled with the limited foreign exchange supply.

He said: “Considering the structure of our economy, this entails imports becoming expensive for consumers as traders will pass on the cost to consumers.”

On his part, market analyst Cosmas Chigwe believes the kwacha has largely been stable based on the perception that foreign exchange availability is bound to improve after Malawi clinched a four-year $175 million (about K297 billion) Extended Credit Facility (ECF) programme with the International Monetary Fund in November last year, which resulted in some improvement in forex inflow following disbursements by donors.

He said: “We have seen the parallel market rate has started to inch upwards in recent weeks.

“It was, therefore, logical that with the better price discovery happening through the foreign exchange auctions, the formal rate will also start to trend upwards.”

Banking and finance expert Misheck Esau said in an interview on Wednesday that although not pleasing, the depreciation is not surprising.

He said until the economy reaches a full alignment with prevailing market rates, the local currency will continue to perform poorly as demand forces are still much stronger than supply factors.

“The other sad part is that continued depreciation of the local currency is happening when we have not seen the benefits of the massive devaluation of the past 24 months. The sure thing is the continued pressure on livelihoods,” he said.

The RBM has been conducting monthly forex auctions since January 2023, leading to a 14 percent depreciation of the local currency against the dollar from June to October 2023.

More recently, the central bank announced plans to increase the frequency of foreign exchange auctions and permit intermediaries to trade at freely negotiated rates.

However, although the kwacha had remained largely stable at K1 700 following the November 2023 devaluation, resulting in the spread between the official and median bureau rates narrowed to six percent, the spread has started to widen and moving to over 17 percent since January this year.

Meanwhile, Malawi Confederation of Chambers of Commerce and Industry president Lekani Katandula said while they do not anticipate businesses to immediately react to the depreciation given its relatively small margin, businesses expect gradual movements in currency exchange rate if government stays true to the commitment to keep the kwacha aligned to market forces.

“This is a better approach than fixing the kwacha for a long period and then making a big adjustment,” he said.

However, National Working Group on Trade Policy chairperson Fredrick Changaya fears the move may lead to capital erosion and resilience challenges for businesses.

He said: “Traders sometimes run on foreign credit where suppliers lend us goods. But we may have already sold the goods in Malawi kwacha waiting for forex and with the depreciation, one ends up selling at a loss.”

However, the weakening of the kwacha when forex is still scarce on the market has left Consumers Association of Malawi executive director John Kapito fearing for the welfare of consumers.

He said “the high prices of goods on market and this pushes consumers into more poverty”.

However, for the tobacco farmer, this could be good news as the devaluation will result in more kwacha earnings.

Said Scotland-based Malawian economist Velli Nyirongo: “This, in turn, is expected to bolster the nation’s dollar reserves. Additionally, the potential for enhanced remittances exists and tourism.

“It is hoped that the kwacha’s value will naturally recover. However, should it persist, we may encounter sticky inflation due to the increased cost of importing essential goods.”

RBM spokesperson Mark Lungu admitted in an interview with The Nation on Tuesday that there is continued imbalance of forex inflow and market demand despite improved donor inflows.

“The country received some foreign exchange inflows from its developing partners after going on an ECF programme and continues to receive that support even now,” he said.

Lungu said the country continues to face a mismatch between supply and demand of foreign exchange.”

Meanwhile, data shows that official foreign exchange reserves improved slightly in 2023, but has dropped to $143 million (about K243 billion) or 0.57 months of import cover at the end of February. n