Forex strategy under spotlight
The Reserve Bank of Malawi (RBM) decision to re-introduce the mandatory sale of export proceeds seems to be struggling to improve foreign exchange liquidity, figures from the central bank show.
RBM announced the measure in August, directing exporters 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 (FCDAs) to improve liquidity.
But according to the RBM Financial Market Developments report, gross official reserves continue to decline though the injection of around $20 million (about K16 billion) in converted FCDA holdings had an immediate once-off positive impact on liquidity by the end of August.
The data shows that gross official reserves have since fallen from $604.5, which is an equivalent of 2.42 months of import cover in August to $521.87—an equivalent of 2.09 months of import cover—in September.
The development, according to analysts, reflects demand and supply imbalances which are failing to address liquidity challenges.
In an interview on Tuesday, Bridgepath Capital Limited chief executive officer Emmanuel Chokani in an interview on Tuesday observed that the foreign exchange issues emanate from structural problems in the country.
He said the sure way out is by substituting some imported products for locally produced ones.
“Although some items such as fuel need to be imported, the production of certain products can surely be efficiently produced within the country. This would help ease the forex issue as it would lower imports,” said Chokani.
Financial Market Dealers Association of Malawi (Fimda) said although the directive had an immediate impact on liquidity when it was introduced, the gulf between the market demand and the current supply remains an issue.
Fimda president Mclewen Sikwese said the trickling of foreign exchange from the directive is, therefore, not enough to address the liquidity challenges.
He said: “The main reason we have not had an immediate huge impact is mainly to do with the composition of the roughly $400 million FCDA holdings sitting with banks at the time of the directive where nearly 80 percent is non-export proceeds.
“The majority of the flows sitting in the FCDAs in banks are not affected by the directive; hence, the muted impact of the directive.”
Sikwese is, however, upbeat that the directive is expected to have a longer lasting impact on the conversions of the incoming export proceeds when it is looked at together with the other central bank’s move to reduce the period for repatriation of export proceeds from 180 days to 120 days from the date of exportation.
In 1994, RBM introduced the export incentive scheme that allowed exporters to retain export proceeds in their FCDAs.
The scheme started with a retention or conversion ratio of 10/90 and has progressively been adjusted downwards until it was abolished in March 2015.
Since the abolishment of the retention or conversion ratio, exporters were allowed to retain 100 percent of export proceeds in their FCDA.
RBM Governor Wilson Banda said the reintroduction of this decision to inject part of the proceeds into the system to provide liquidity to help the RBM achieve its objective will improve the country’s foreign exchange reserves.
He said the directive is going to be reviewed from time to time as the central bank’s ideal arrangement is to have 100 percent retention of export proceeds.
Banda said in the short-term, the central bank will engage regional and international banks to provide the country with short liquidity in foreign currency.
Meanwhile, the depletion of the reserves position has lately seen the kwacha losing value against the dollar and other major trading currencies.
The kwacha is currently trading at K823.69 to a dollar.
