The kwacha is fast losing value against the dollar and other major trading currencies largely due to the continued demand for foreign exchange, the Reserve Bank of Malawi has said.
Figures from the Reserve Bank of Malawi (RBM) show that the local unit lost 4.33 percent against the dollar in the second half of 2020 due to the decline in foreign exchange supply, which exerted pressure on the country’s foreign exchange reserves.
RBM’s foreign exchange market report indicated that the kwacha further depreciated against the dollar to trade at K789 from K771.20 per dollar as of end January 2021.
The RBM has since projected that the continued shortage of foreign exchange on the market is expected to trigger a further depreciation of the exchange rate in the near-term.
In its Financial Market Intelligence Report for January 2021 issued on Friday, the RBM also said the depreciation of the kwacha will further trigger a rise in non-food inflation through high costs of imported goods, including fuel.
The central bank, however, said as the country approaches the harvest season, food price pressures are expected to remain subdued due to increased supply of maize and other cereals.
Malawi, an agro-based economy, experiences seasonality in the foreign exchange market; hence, the depreciation of the currency also follows the seasonal nature of the market.
During the lean season, there is less foreign exchange coming into the market as the tobacco season is closed and there is high demand for forex as farm inputs such as fertiliser are imported.
Financial Market Dealers Association president Mclewen Sikwese in an earlier interview projected that there would be sustained supply and demand imbalances, which will continue to exert pressure on the kwacha.
He said, among others, the impact of Covid-19 on foreign exchange supply will be key to the performance of the kwacha in the medium-term.
Said Sikwese: “How the pandemic will affect the operations of foreign investors, international organisations and the tobacco selling season which together are the biggest sources of foreign exchange will determine the stability of the kwacha.
“Postponement or slowdown of their operations due to Covid-19 will significantly depress supplies and lead to more pressure on the kwacha.”
Meanwhile, RBM figures show that gross official reserves—under the direct control of RBM—dropped between February 2020 and February 2021 to $483.38 million (about K372 billion) or 2.31 months of import cover from $785.31 million (K605 billion) or 3.76 months of import cover.