In 2021, the Malawi economy experienced shortage of foreign currency in the formal financial market.
The acute shortage of foreign currency was prevalent all year after the country’s reserves were depleted as a result of the reduction in the resources at the disposal of the central bank to pay for government obligations and support the importation of imports.
Foreign exchange reserves sunk below the internationally recommended three months threshold of import cover, which is the rule of thumb.
Reserve Bank of Malawi (RBM) Financial Market Developments showed that gross official reserves, which are under the direct control of RBM, dropped to $389.26 million or 1.56 months of import cover in November 2021 from $502.98 million or 2.41 months of import cover in January 2021.
The forex shortage had a serious multiplier effect, triggering supply and demand imbalances in the market.
Such being the case, businesses bore the burden of the foreign exchange shortages where both large and small businesses were forced to delay importation of goods as foreign exchange remained elusive.
Malawi Confederation of Chambers of Commerce and Industry president James Chimwaza indicated that businesses were worst hit by forex shortage on the market, forcing some to scale down.
“The situation has not been easy for businesses who have struggled to access forex,” he said.
Cross-border Traders Association of Malawi president Steve Yohane said due to shortage of foreign exchange, the market was distorted and planning was difficult for cross-border traders.
“We can only hope that authorities do something quick because we need forex to keep our businesses afloat,” he said.
While the country has for a long time relied more on tobacco to generate forex for its import needs, the foreign exchange realised has been dwindling over the years and can hardly sustain one month of imports.
For example, this year, Malawi realised $197.1 million from tobacco which has not been enough to bolster the country’s reserves position.
The country’s monthly foreign exchange requirement was revised upwards in July this year from $209 million to $250 million.
To salvage the situation, in August this year, RBM re-introduced the mandatory sale of export proceeds, a move that was meant to ensure foreign exchange availability in the country.
Under the directive, all exporters were required to sell a minimum of 30 percent of their export proceeds to authorised dealer banks (ADBs) while retaining, at most, 70 percent of the proceeds in their Foreign Currency Denominated Accounts (FCDAs).
RBM Governor Wilson Banda said the move was aimed to ease the tightness in the foreign exchange market where the sale is meant to be done within two days from the date of receipt of the proceeds.
RBM made it mandatory that all exporters liquidate 30 percent of what is currently in their FCDAs by selling the foreign exchange to any ADBs offering a better exchange rate.
But though the injection of around $20 million in converted FCDA holdings had an immediate positive impact on liquidity by the end of August, this was the once-off impact as reserves kept on dropping a month after the directive.
RBM figures show that gross official reserves picked up to $604.5 million, which is an equivalent of 2.42 months of import cover, in August but dropped to $521.87 million, which is an equivalent of 2.09 months of import cover, in September.
Bridgepath Capital Limited chief executive officer Emmanuel Chokani observed that the foreign exchange issue emanates from structural problems in the economy.
He said to remedy the situation, there is need to substitute some imported products for locally produced ones.
Financial Market Dealers Association of Malawi (Fimda) president Mclewen Sikwese noted that although the RBM directive had an immediate impact on liquidity when introduced, the gulf between the market demand and supply remains an issue.