The Reserve Bank of Malawi’s (RBM) 49 percent easing of the kwacha on Monday will not kill the thriving black or parallel market because the local unit remains relatively overvalued, Nico Asset Managers has said.
RBM Governor Charles Chuka, in a statement on Monday, said with the official rate at K250 per dollar, the exchange rate is well adjusted as the black market is underdevalued.
He said with the devaluation, the local currency is now fully liberalised.
With the RBM’s move, the kwacha has eased by 51.5 percent against the pound sterling to K403, the rand is now trading at K32, a 48 percent drop and the euro has weakened by 47 percent and is now trading at K325.
But the investment advisory firm, in its monthly economic report for April 2012 released on Monday, believes the black market trading is likely to persist as the devaluation is not expected to provide for the massive shortage of foreign exchange the economy is experiencing.
“Black market trading may reduce drastically if a more liberalised floating rate policy is followed. Nevertheless, regaining donor confidence could see an improvement in forex availability; hence, partly neutralising the overvaluation. The kwacha remains relatively overvalued to the black market rate which is trading at between K280 and K300 to one US dollar,” reads the report in part.
It says forex availability could still remain a challenge due to backlog of unpaid foreign exchange liabilities with new donor funds likely to be channelled to repay existing liabilities.
But Nico Asset Managers says the weakening of the local currency is in line with International Monetary Fund’s (IMF) projected devaluation of between K230 and K250 per US dollar.
On the major implications of the devaluation, the firm said the Malawi economy will start enjoying donor inflows with availability of forex improving which would positively affect the ability to import items such as fuel, fertiliser and other materials.
“Overall, this will affect production in various sectors of the economy resulting in improved economic growth,” says the firm.
It further says donor funding and possibly declining imports will also result in tightening of the fiscal deficit, thereby reducing governments demand for borrowing.
Government’s reduction of borrowing will be good news because it could provide a leeway to reduce yields on government securities.
More foreign exchange inflows into the economy is also expected to improve investor confidence in the market as foreign investors may be more positive about their ability to convert investment returns to foreign currency, thereby providing new foreign investments into the country.
At the same time, the devaluation will also cause imports to become more expensive; hence, worsening the inflationary environment and causing the trade deficit to widen.
The IMF, in a statement by its mission chief for Malawi, Tsidi Tsikata, dated April 2 2012, said over the years, persistent overvaluation of the kwacha has contributed to growth in imports outpacing growth in exports while official international reserves have remained at very low levels, thus rendering the economy highly vulnerable to external shocks.
