FIRM WARNS OF KWACHA FALL
Nico Asset Managers Limited, a Blantyre-based investment advisory firm, has warned that the kwacha will depreciate in the medium to long-term due to due to significant imports dwarfing exports, low or unpredictable donor support.
The firm has observed that although overall, the local currency will appreciate in the short-term, the local unit will later plunge against major trading currencies.
In its March 2014 economic report, Nico Asset Managers Limited has indicated that the exchange rate is expected to continue appreciating as proceeds from the tobacco, which wires in about 60 percent of the country’s foreign exchange earnings, pours in.
The firm has noted that the country relies on exports and donor aid for forex inflows to support the kwacha.
But although a grouping of donors under the Common Approach to Budget Support (Cabs), met on March 25 2014, it is not clear how much aid, if any, was going to be disbursed to Malawi.
The kwacha has been appreciating beginning early this year due to the Reserve Bank of Malawi (RBM) tight monetary policy, speculation and the tobacco marketing season.
According to RBM statistics, the local unit has gained by seven percent from K449.11 to K417.52 between January 3 and April 14.
Regardless of the recent appreciation, Nico Asset Managers Limited has said there are risks on the local currency emanating from the uncertainty on donor funds and election-related spending.
However, the central bank has said it will ensure stability of the local currency through forex purchases.
Recently, RBM spokesperson Mbane Ngwira said that the central bank cannot stop forex operations which is aimed to control the kwacha appreciation which he noted if left unchecked could hit K300 to the dollar.
The RBM has been buying forex from the market, taking advantage of the recent improvement in its availability boosting forex reserves.
Malawi’s total international forex reserves, official and private, rose to $842 million or an equivalent of 4.48 months import cover on April 11.
The RBM and the International Monetary Fund (IMF) argue that improved forex reserves will provide the economy with a buffer against exogenous shocks.
The IMF during the recent mission said the pick-up in forex reserves will also allow the RBM to effectively intervene in the foreign exchange market to manage excessive volatility in the exchange rate, arising from the highly seasonal pattern of private foreign exchange inflows.
But last year, although there was a fairly improved availability of foreign exchange, the kwacha depreciated heavily especially in the fourth quarter due to what experts described as market dynamics including speculation and hoarding.
