The kwacha is gradually aligning itself to the forces of demand and supply following its floatation which will result in the easing of parallel market trading, Nico Asset Managers Limited has said.
â€œAs the economy has regained donor confidence, the outlook on forex availability is promising. With the backlog of unpaid forex liabilities, new donor funds and tobacco proceeds may be channelled to repay existing liabilities. Once sufficient aid inflows from donors are realised, we might see the kwacha stabilising,â€ says the investment advisory firm in its monthly economic review for May 2012.
But the firm says once the tobacco season, which started in March, ends, the local unit could continue to weaken.
Since the Reserve Bank of Malawi (RBM) devalued the kwacha by 49 percent on May 7 and subsequently adopted the free floating exchange rate system and with the proceeds of tobacco dollars going directly to commercial banks, the economy has registered an improvement in the availability of foreign exchange, observes the firm.
Free floating exchange rate will result in depreciation or appreciation of the exchange rate depending on the availability of foreign exchange on the market.
The firmâ€™s data show that the exchange rate has been gradually weakening and has moved from K250 to one US dollar since it was devalued depreciating to K278 to one US dollar, representing a 11 percent drop.
Nico Asset Managers, a subsidiary of the Malawi Stock Exchange (MSE)-listed Nico Holdings Limited, says more forex inflow into the economy is expected to improve investorâ€™s confidence on the market as foreign investors will be more positive about their ability to convert investment returns to foreign currency; thereby providing new foreign direct and portfolio investments into the country.
â€œThe availability of forex could improve which would positively affect the ability to import items such as fuel, fertiliser and other materials. Overall, this will help production in various sectors of the economy resulting in improved economic growth. Funds from donors will also result in tightening of the fiscal deficit reducing governments demand for borrowing,â€ reads the review.
According to market statistics from the RBM, total foreign exchange reserves, as at May 18 2012, stood at $274 million (K68 billion), an equivalent of 2.12 months worth of import cover. This compares to $302 million (K75.5 billion), an equivalent of 2.34 months worth of import cover as at 30 April 2012
Of the total reserves, $87 million (K21.7 billion) was sitting with the authorities. This means that reserves for the private sector at $187 million are higher than official reserves reflecting the policy change of tobacco dollars going directly to commercial banks.
The Nico Asset Managers report, which has commented on a wide range of issues, says inflation which was recorded at 12.4 percent in April, is expected to soar in 2012 largely due to the devaluation of the kwacha which has resulted in higher fuel prices and other import costs which will increase the cost of living.
â€œRising inflation rate will erode the purchasing power of money; hence, resulting in lower disposable incomes and reduced savings. A reduction in savings will in turn reduce funds available for capital investments resulting in low private sector activity and slow economic growth. High inflation also hurts the rural poor and will put a strain on government to provide social support,â€ says the review.
The RBM increased the bank rate â€” the rate at which commercial banks borrow from the central bank â€” by three percentage points to 16 percent from 13 percent and commercial banks followed suit and also increased their lending rates.
The firm says high lending rates will reduce private sector investment and growth pushing up borrowing costs which could result in increased risk of defaults and existing liabilities.