‘Malawi Kwacha risks massive depreciation’

Money market analysts have warned that the Malawi kwacha risks a ‘dramatic’ depreciation if monetary authorities relax in the wake of huge demand for foreign exchange.

Alliance Capital Limited has warned a week after the Financial Market Dealers Association (Fimda) also cautioned that the local currency will continue losing ground because of dwindling foreign exchange reserves.

This means importers should brace up for tough times ahead as they may have to dig deeper into their pockets to import goods and services.

This is, however, good news to exporters as they are likely to realise higher proceeds from their export consignments if the kwacha falls.

Alliance Capital has observed in its latest market commentary that the kwacha experienced a further depreciation from an average of K278.43 to K280.40 against the US dollar as at August 17 2012.

The firm also noted that there are strong indications that parallel market rates have, once again, picked up to ranges of between K300 and K320, depending on the forces of demand and supply.

“If unchecked and, in the absence of support and intervention from the central bank, this trend could lead to an increase in speculation and … a dramatic depreciation of the currency within a short period of time,” warns the company.

Since the Reserve Bank of Malawi (RBM) devalued the kwacha and subsequently floated it, the local currency has been weakening substantially and was trading at around K280 to a dollar in most authorised dealer banks (ADBs) as of Monday.

The further depreciation of the kwacha confirms excessive demand for foreign currency on the market against low supply.

Business News confirmed that the kwacha was selling between K300 and 325 on Monday depending on demand and supply.

With proceeds from Malawi’s major forex earner, tobacco, tumbling by 40 percent in 2012 to $176.8 (K49.5 billion) million from last year’s $293 (K82 billion) million, foreign currency reserves are under severe pressure and are likely to sink the local currency against the value of other international currencies.

Gross official reserves, according to RBM figures, show a marginal decline in gross reserves to $191.0 million down from $199.0 million, representing 1.48 import cover as at August 17 2012.

Malawi needs $129 million to meet its monthly import bill. The money is mainly used for procuring essential imports such as fuel, fertiliser, pharmaceuticals and others.

 “Despite the known bureaucratic tendencies in most governments, we would urge that the much-applauded ‘goodwill’ shown to the country must be translated into ‘good faith’ timely to avert a possible forex crunch that could derail the positive developments that the country has experienced since April, 2012,” says Alliance Capital Limited.

Fimda president Lusekelo Kaoloka last week called for market intervention by way of injecting foreign currency to help stabilise the fluctuating local currency.

RBM spokesperson Ralph Tseka could not be drawn into commenting on the issue as he did not pick up his mobile phone.