Business Unpacked

Where will more forex come from?

This week, Standard Bank Malawi Limited, one of the commercial banks operating in the country, made an interesting statement about the kwacha exchange rate and what the future holds in terms of foreign exchange availability as the lean period approaches.

In brief, Standard Bank ruled out the possibility of the economy experiencing massive, or what I would prefer to call volatile, depreciation of the kwacha during the lean period or as the country moves into the lean period.

I quote Standard Bank’s director of global markets Frank Chantaya who said: “We don’t see massive depreciation [of the kwacha] beyond, but a stable depreciation. We expect the kwacha to be fully stable and, if anything, a bit of depreciations, obviously, but not as steep as it was.”

In May 2012, the kwacha was devaluaed by 49 percent and subsequently floated, trading at K420 to the dollar from K250. Of course, currently the kwacha is trading at around K350 to the dollar.

Naturally, the kwacha was expected to stabilise and gain in strength as it did in the midst of the tobacco marketing season. At least, that has been the seasonal trend as during the tobacco marketing season, there is steady supply of foreign exchange against comparatively weak demand.

Besides the steady flow of tobacco dollars, the weak demand for forex and the kwacha’s apparent stabilisation were also a direct consequence of an effective monetary policy implementation strategy by the Reserve Bank of Malawi (RBM). Banks had also cleared external arrears which had accumulated in the previous three years.

In the course of the excitement about the kwacha’s strengthening in value, which saw even President Joyce Banda giving updates on the prevailing exchange rates at political rallies, I did caution that the real test for our beloved kwacha awaited the lean season.

Well, the tobacco marketing season is over. The country has earned an estimated $355 million dollars from sales of the major foreign exchange earner. In fact,the $355 million was above the estimated target of $300 million.

Currently, we spend, as a country, $188 million monthly on imports. RBM figures show that in 2013, Malawi will need $2 billion to fulfill its import bill for various goods and services. The fuel bill alone is around $33 million monthly or $396 million per year, which in theory cancels out the tobacco forex earnings.

This, among other market fundamentals and trends, is where I have problems with the statement from Standard Bank. I feel the outlook for the future is not as rosy as the bank is painting it.

For the kwacha to be stable and experience minimum depreciation, it will require sustainable availability of forex in the market. Now, with the tobacco marketing season over and the country importing fertilisers and other farm inputs above the normal imports of medicines, fuel and other goods and services, where will the extra forex come from?

In other words, the economy, which has a narrow export base and is heavily dependent on imports including simple items such as toothpicks, will need enough stocks of foreign exchange to achieve or sustain the projections outlined by Standard Bank.

If the answer is ‘yes’ to having enough forex stocks to leverage against increased pressure of imports, where will the extra dollars come from?

Unless RBM and the real sector indicate what will sustain the kwacha at its current levels, like the Biblical Thomas Didimus who said could only believe Jesus Christ had resurrected after feeling his fingers in the holes pierced by nails, I have reason to doubt and worry about our beloved kwacha’s ability to survive the forthcoming “storm.”

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