Business Unpacked

Banks should justify kwacha fall

In August this year, when Standard Bank (Malawi) Limited ruled out the possibility of the economy experiencing massive, or what I prefer to call volatile,depreciation of the kwacha during the lean period or as the country moves into the lean period, I said I would only believe it if the Reserve Bank of Malawi (RBM) and the real sector indicated what will sustain the kwacha.

Like the biblical Thomas Didimus who said he could only believe Jesus Christ had resurrected after feeling his fingers in the holes pierced by nails, I had reason to doubt and worry about our beloved kwacha’s ability to survive the forthcoming “storm.”

Then, three or so weeks ago, RBM Governor Charles Chuka spoke at the Bankers’ Annual Dinner and Dance in Blantyre where he boasted that the central bank had “sufficient” foreign exchange reserves and enough muscle to spare the kwacha massive battering during the lean period we are in.

I must confess that this was one bold statement from the governor, especially given the traditional trend of foreign exchange reserves in the country which dwindle at this time of the year when imports of farm inputs exert pressure.

Chuka may not have elaborated on the source of the forex but, somehow, I was just impressed with the level of his confidence. I know RBM actually bought some forex from the market, perhaps to boost its reserves for the rainy day.

To emphasise his seriousness, the governor warned commercial banks not to play around with the kwacha. He said he will be watching which bank is playing games in as far as the exchange rate is concerned.

Tobacco remains Malawi’s major foreign exchange earner. It is natural, therefore, for the kwacha to stabilise and gain in strength as it did in the midst of the tobacco marketing season that ended in August. At least, that has been the seasonal trend as during the tobacco marketing season, there is steady supply of foreign exchange against a comparatively weak demand.

Fast forward to this week, things are not looking good. Market statistics show that our beloved kwacha is quietly being battered by its major trading currencies, notably the dollar, euro, South African rand and British pound. For example, RBM’s official exchange rates indicate that the kwacha has declined by 18 percent since June 3, to selling at K518 on September 30 against the euro, and by 20 percent to selling at K619 against the pound sterling. The local unit has also depreciated by 13 percent to selling at K384 against the dollar and by 13 percent to selling at K38 against the rand.

Ironically, the kwacha is depreciating at a time when foreign exchange reserves are increasing. This is where I find things not adding up. It raises the question of what happened to market forces of demand and supply. In fact, on the world market the dollar is also losing value.

Increasing forex reserves mean that the country has enough forex, hence this should be reflected in the performance or resilience of the kwacha.

According to RBM, gross official forex reserves rose from $436 million on September 13 to $453 million on September 20 this year whereas private sector reserves stood at $297 million on September 20, slightly down from $306 million on September 13 2013.

Given the free floating foreign exchange regime, I am tempted to believe that the depreciation is artificial. I feel some dealers or banks are deliberately distorting the market or, to quote the governor, “playing games” on the exchange rate.

If this passes to be true, then it is very unethical and unfortunate on the part of the concerned banks as the exchange rate has wider implications beyond making a quick buck in one or two deals.

For example, a distorted kwacha exchange rate will have an impact on fuel pump prices which, using the automatic pricing mechanism, are either increased or reduced based on changes in the exchange rate, among other variables. Fuel prices also have a cost-push effect on other goods and services as transport is a major component in pricing.

I would urge RBM to challenge the authorised dealer banks to justify what is triggering the changes in the value of the kwacha. Appropriate action should be taken against those found ‘guilty’ of manipulating the market.

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