The kwacha, which has lost substantial ground in the past seven months against major trading currencies, has continued to lose value against the dollar and British pound on account of low exports.
The local unit will end the year at its lowest, despite Reserve Bank of Malawi’s (RBM) efforts in revising the policy rate in the year, apparently to tame it.
The kwacha has been depreciating rapidly in the third and fourth quarter of 2015. According to Nico Asset Managers, the sharp fall is mostly as a result of speculation in the run up to the lean season.
Malawi, an agro-based economy, experiences seasonality in the foreign exchange market, and thus the depreciation of the currency follows the seasonal nature of the market. During the lean season there is less forex coming into the market as the tobacco season is closed and there is high demand for forex as farm inputs like fertiliser are being imported, like the case now.
Apart from these factors, this year the kwacha fall has been unstoppable due to, among other things, the gains in the dollar.
As of yesterday, the foreign exchange market indicated that the kwacha reached historic levels trading at K1 000 to the British pound and K668 to the dollar, a development one financial dealer in an interview described as “a deliberate move by banks to control demand and retain supply, which is usually scarce during this period.”
However Bankers Association of Malawi (BAM) president Misheck Esau said the sharp fall and lack of stability of the kwacha is largely derived by lack of investment in production for export purposes.
He said the local unit and economy can only stabilise on the back of a rapid and significant move by both private sector and government to invest in production for export to bridge the balance of payments gap.
He said: “Since 2012, the economy has relied on single-handed measures around monetary policy as a way of bringing economic stability generally and to the exchange rate stability specifically.
“These measures are only working to hurt the economy even more. Typical monetary policy when done without backing from production will not work as we have seen.”
Esau, while observing that the economic environment has not been conducive for businesses in the year, calls upon private sector players to step up efforts in reforming the economy.
“It’s about time private sector whose businesses are predominantly importing to rethink their business models towards diversification into exports to mitigate the risks they face as they go about the import business,” he said.
The dealer added in the long-term a depreciating currency will widen the current account deficit further in kwacha terms, which will in turn negatively affect economic growth in nominal terms. n