Forex shortage puts pressure on kwacha

The Economist Intelligence Unit (EIU) has projected the kwacha to moderate to K837 to the dollar this year and K937.4 to the dollar by 2026 as the foreign exchange shortage continues to bite.

The forecast by EIU, a firm within the Economist Group which provides forecasting and advisory services, comes at a time the kwacha continues to face pressure largely on account of the declining forex levels in the country.

According to the EIU forecast contained in the March 2022 Nico Asset Managers Limited report, this will be due to a chronic current-account deficit.

Said the firm in the report: “A low stock of reserves and the high probability of a sudden end to foreign-currency inflows remain the major downside risks to exchange rate stability over the forecast period, as the authorities will not be able to support the kwacha if these risks materialise.

“Export earnings from the agricultural sector were expected to boost reserves, however, foreign exchange inflows are likely to negatively impact Malawi’s macroeconomic conditions in the 2022/23 consumption season due to reduced production and lower tobacco sales.”

In Malawi, the current account deficit has traditionally been large, averaging just under 19 percent of the gross domestic product (GDP) on account of a large merchandise trade deficit, owing to Malawi’s dependence on fuel and capital imports, according to the EIU data.

The country’s current account deficit stood at $1.4 billion, representing 12.7 percent of the GDP due to the worsening of the goods account by 3.1 percent to $1.78 billion.

In an interview, market analyst Cosmas Chigwe observed that the kwacha depreciation is expected as structural problems on the supply side continue to persist.

He said: “We continue to have a deficit between supply and demand of foreign exchange and the kwacha will continue responding to this.”

Financial Market Dealers Association of Malawi president Mclewen Sikwese also observed that the kwacha continues to suffer from both supply and demand misalignment, but also a speculative element due to the lack of confidence in the future value of the kwacha.

Troubled by the declining forex position, Reserve Bank of Malawi (RBM) recently announced that all exporters shall sell a minimum of 30 percent of their export proceeds to the RBM through authorised dealer banks while retaining, at most, 70 percent of the proceeds in their foreign currency denominated accounts. Meanwhile, gross official forex reserves under the direct control of the RBM stood at $374.48 million or 1.50 months of import cover in March 2022 compared to $410.16 million, an equivalent of 1.86 months of import cover in March 2021.