Forex demand dampens kwacha
The Reserve Bank of Malawi (RBM) has attributed the continued depreciation of the kwacha to the excess demand for foreign exchange on the market against supply.
RBM’s explanation comes against the backdrop of figures showing that as of last Friday, the kwacha had lost K3.10 against the dollar to close the week at K823.39 from K820.29 the week before.
Financial Market Dealers Association of Malawi (Fimda) has since asked authorities to put in place measures to address the demand and supply imbalances to improve confidence in the future value of the local unit.
In an interview on Sunday, Fimda president Mclewen Sikwese said in a floating exchange rate regime, the value of the currency is affected by 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.
“In our case, the kwacha continues to suffer from both as there is a supply and demand misalignment, but also a speculative element due to the lack of confidence in the future value of the kwacha,” he said.
Sikwese said this can be done by building liquid foreign exchange reserves of import cover position and using them to supply the foreign exchange market with foreign currency.
In August, RBM announced the re-introduction of the mandatory sale of export proceeds to ease foreign exchange liquidity challenges.
Under the new provision, exporters are required to sell a minimum of 30 percent of their export proceeds to authorised dealer banks while retaining 70 percent of the proceeds in their foreign currency denominated accounts.
RBM Governor Wilson Banda earlier said the injection of part of proceeds into the system to provide liquidity is helping the bank achieve its objective and will help to improve the country’s foreign exchange reserves.
He said: “The country has over the past couple of months gone through a period where foreign currency has been scarce.
“However, when we look at the FCDA [Foreign Currency Denominated Account] holdings, we see substantial amounts which through this directive have partly helped in terms of liquidity.”
In the short-term, Banda said the central bank is also looking at arranging facilities with regional and international banks to provide the country with short liquidity in foreign currency.
RBM figures show that the gross official forex reserves for August 2020 decreased to $604.50 million or 2.42 months of import cover from $642.86 million or 3.08 months of import cover.
Gross official reserves have continued to decline, dropping by $11.5 million to close the review week on Friday at $537.7 million, an equivalent of 2.15 months of imports.
The Economist Intelligence Unit, a United Kingdom-based research and analysis division of Economist Group, has since indicated that a wide current account deficit will continue to exert downward pressure on the kwacha throughout the year.
Last year, the kwacha depreciated by about 4.6 percent against the dollar.
