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The flip side of the Malawi kwacha appreciation

Lilongwe-based Alexander Phodogoma is a bitter local exporter.

He derives his livelihood from exporting scrap metal to the international market.money

But today Phodogoma’s business is shaky and his profit margins have been significantly eroded beginning the last quarter of 2014 due to the strengthening of the local unit, the kwacha.

“In recent weeks, I sent 28 tonnes of scrap metal to my customer in Tanzania called Steel Masters, but when I converted my earnings in kwacha terms back home, I calculated that I lost about K175 000 from the consignment due to the strong kwacha,” said Phodogoma.

He is also general secretary of Central Region Scrap Metal Dealers Association.

Phodogoma is not alone in feeling the pinch of a strong kwacha.

Business Review also sought the dark side of the recent kwacha appreciation from the perspective of another local exporting giant called Malawi Organic Farmers Association (Moga).

The association strikes its gold in exporting coffee, sunflower and Soya beans to Taiwan and Zimbabwe.

“The situation is currently bad, for instance, one of our commodities is priced at $2 [about K850 at the current exchange rate] per kilogramme, but before the kwacha strengthned, we used to get back about K1 000,” said Moga, executive director Stanley Chidaya on Tuesday.

He said it takes 30 days to ship their exports to overseas market; hence, compounding the loss in proceeds due to the fluctuating currency.

Phodogoma and Chidaya’s sad tales reflect the dilemma that monetary policy authorities, specifically the Reserve Bank of Malawi (RBM), face in the wake of an appreciating currency against the depreciating currency.

This is true to the adage that one man’s food is another man’s poison.

The local currency softened by more than 20 percent towards the end of last year, propelled by donor aid freeze and the closure of tobacco market in September.

But since December, the kwacha has appreciated strongly against major convertibles, taking the market by surprise, mainly on account of a debt swap deal with PTA Banks whose proceeds share up the local currency.

In March 2015, the  kwacha appreciated against the British pound, the South African rand and the euro and marginally depreciated against the United States dollar, according to RBM statistics we have seen.

Closing the month at K443.12 against the dollar from K439.42 in the previous month, the currency  appreciated by 5.9 percent in the first quarter of 2015 alone, according to RBM.

And by March 31 this year, total forex reserves stood at $942 million or an equivalent of 4.93 months of import cover, one of the best foreign exchange positions Malawi has ever attained in its history.

The internationally recommended rule of thumb is to accumulate atleast three months of import cover.

But the private sector, led by the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) and other economic watchers are concerned with recent economic trends.

MCCCI president Newton Kambala talked tough on Tuesday when called to give the chamber’s perspective on the recent strengthening of the kwacha.

“The question is not that of the strength of the kwacha hurting exporter because in the first place nobody is exporting. Let me ask you as a reporter, who is producing now in the country? There are no incentives to produce,” noted Kambala, who challenged this reporter to name any company that is currently producing and exporting.

He then gave a personal experience as a farmer.

“I have two farms, but I can tell you that I don’t have the courage to invest in those farms because I have no incentive to produce.”

Government, through the ministry of Industry and Trade, custodians of the National Export Strategy (NES), says it is for a stable currency.

Ministry of Industry and Trade spokesperson Wiskes Nkombezi on Tuesday said government understands the challenges facing the local exporters with the strong kwacha. He also admitted that a strong kwacha is bad for the NES.

And as the dilemma to strike a balancing act of using the exchange rate as one of the means of boosting exports versus the need to cushion consumers in an import dependent and land-locked Malawi, terms of trade (ToT) is also quickly moving against the country’s, according to World Bank senior economist for Malawi Richard Record.

This means that Malawi has to trade an increasingly large volume of exports to pay for the same volume of imports.

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