Financial Market Dealers Association of Malawi (Fimda) has urged authorities to maintain the balance between market supply, demand fundamentals and the perception of players in the foreign exchange market to cushion the kwacha.
Fimda president Mclewen Sikwese told Business News on Saturday that authorities need to put in place measures to address the demand and supply imbalances to improve confidence in the future value of the local unit.
He said: “In a floating exchange rate regime, the value reflecting the demand and supply dynamics in the foreign exchange market and the speculative value due to the level of confidence that the buyers and sellers of foreign currency have on the future value of a particular currency affect the value currency.
“In our case, the kwacha continues to suffer from both as there is a supply, and demand mis-alignment but also a speculative element due to the lack of confidence in the future value of the kwacha.”
Sikwese said this can be done by building a highly liquid foreign reserves of import cover position and using it to publicly supply the foreign exchange market with foreign currency.
Currently, Reserve Bank of Malawi (RBM) data on forex bureau exchange rates as published on its website indicates that the kwacha has retreated from an average K778 in January to K813 presently.
Gross official reserves—under the direct control of RBM—have also dropped between June 2020 and June 2021 to $424.91 million (an equivalent of 1.70 months of import cover) from $682.66 million (an equivalent of 3.27 months of import cover). The worsening depreciation of the kwacha comes despite the tobacco marketing season is in progress, in which the country traditionally has more foreign exchange, flowing into the market.
In his reaction, Alliance Capital Limited research manager Bond Mtembekeza observed that the local unit is falling in the middle of the agriculture marketing season, which leaves little room for RBM to intervene as the country’s reserves are to low to mount an effective intervention campaign.
He, however, said options to have forex available to stabilise the exchange rate include entering into currency swaps, although this could be a short-term measure.
He said: “In the long-term, we are looking at supporting the current account through deliberate efforts of increasing the volume and value of exports and reducing imports through import substitution.
“As long as there is a current account imbalance, the kwacha will always steadily fall.”
On his part,Bridgepath Capital Limited chief executive officer Emmanuel Chokani observed that there should be a focus to identify short-term solutions to decreasing imports, especially for non-essential items that are produced locally.
“On the export side, more support for agriculture is needed to have structured export markets for products like soybeans and other output that is performing well in the global markets.
“We have export mandates now in place which have been gazetted. A concerted effort should be to quickly operationalise such initiatives,” he said
Earlier, RBM Governor Wilson Banda said to address foreign exchange shortages, which have resulted in the kwacha losing value, the central bank is talking to multilateral institutions for forex help.