Malawi needs to generate enough foreign exchange to balance the supply and demand of the hard cash to sustain the Reserve Bank of Malawi’s (RBM) recent loosening of forex controls, an investment advisory firm has said.
Malawi’s foreign exchange cover has in recent years been in a precarious position.
Analysts argue that despite the sales of tobacco, a crop that brings in more than half of the foreign exchange, being in progress, import cover continues to fall below the internationally recommended cover of at least three months, and it stands at 0.92 months as at March 15 2013 which is below the one-month cover of $188.1 million (K78 billion, at the current exchange rate).
The RBM has, in recent weeks, in its pursuit to liberalise the forex market, been loosening up some of the controls.
In February this year, the central bank revised the retention/conversion ratio to 80/20 from 60/40 to allow exporters to retain 80 percent of their export earnings in their Foreign Currency Denominated Accounts (FCDAs) and sell 20 percent to authorised dealer banks (ADBs).
Two weeks ago, in an exchange control circular number 2/2013, the RBM also stopped the requirement by authorised forex dealers to endorse travellers’ passports with the amount of forex bought to be in line with the Southern African Development Community (Sadc) and the Common Market for Eastern and Southern Africa (Comesa).
This week, RBM also relaxed controls by revising the K3 000 limit on exportation and importation of the local currency by travellers to the equivalent of $5 000 (K2 million, at the current exchange rate) to spur cross-border business between Malawi and its neighbours in line with the Comesa Simplified Trade Regime (STR).
The RBM also said it started loosening foreign exchange control when it devalued the currency by 49 percent in May 2012 and subsequently adopted a market-determined exchange rate.
But the firm, Blantyre-based Alliance Capital Limited, said it is encouraging that the Malawi Government is freeing the foreign exchange market of controls.
“Forex controls have effects that are similar to import quotas and often lead to economic inefficiency. Governments that impose them also often have to incur high administrative expenses.
“Other possible effects include bribery by people who want to buy foreign currencies and the establishment of currency black markets,” says the firm in its weekly commentary.
A number of countries, including Malawi, use forex controls to influence the buying and selling of currencies.
Alliance Capital Limited says one of the ways the government could impose forex controls, is to restrict the possession or use of foreign currencies in the country by allocating foreign currencies or imposing currency transaction tax on currency exchanges.
The RBM has, in recent years, been implementing a number of forex controls as a way of controlling the movement of foreign money which has been in short supply.