Business Unpacked

Kwacha fall begs more questions

In an ideal situation, principles of demand and supply tell us that where demand is higher than supply, then, naturally, the price of a commodity goes up. Conversely, when supply surpasses demand, prices of commodities go down.

Now, picture this situation: The kwacha has depreciated by 16 percent against the dollar since peaking in June 2013 during the tobacco marketing season.

It is a fact that after the close of the tobacco marketing season, which is the major foreign exchange earner contributing close to 60 percent of foreign currency earnings, Malawi faces a lean period for foreign exchange where the demand is higher than supply.

In most cases, during this time of the year there is pressure for foreign exchange as the country imports farm inputs, most notably fertiliser besides the traditional imports of fuel, medicine and raw materials, among other critical imports.

Three or so weeks ago, Reserve Bank of Malawi (RBM) Governor Charles Chuka spoke at the Bankers’ Annual Dinner and Dance in Blantyre where he boasted that the central bank had “sufficient” foreign exchange reserves and enough muscle to spare the kwacha massive battering during the lean period we are in.

And this week, RBM blamed the kwacha’s free fall in recent weeks on the market. I did raise eyebrows as well in my entry last week on the kwacha’s rate of depreciation.

What is ironic t is that the kwacha is depreciating at a time when foreign exchange reserves are increasing. This is where I find things not adding up. It puts into question whether market forces of demand and supply are at play here.

RBM statistics indicated that as of last week, foreign exchange reserves stood at $739 million (about K290 billion) or an equivalent of 3.9 months of imports. This, according to RBM, includes official reserves, authorised dealer banks’ own reserves and private holdings in foreign currency denominated accounts.

Rising foreign exchange reserves mean that the country has enough forex, hence this should be reflected in the performance or resilience of our beloved kwacha which, sadly, is being helplessly battered from all angles.

In last week’s entry, I humbly urged RBM to challenge the authorised dealer banks to justify factors that are triggering the changes in the value of the kwacha. I was, therefore, happy to hear RBM spokesperson Mbane Ngwira indicate this week that there are some elements in the market manipulating the exchange rate.

It is further encouraging to learn that RBM is providing information to all stakeholders for them to make informed decisions on the exchange rate.

From the look of things, speculation and hoarding are at play here. The true value of the kwacha is being distorted.

Recently, one financial market dealer confided to me that in the wake of cut-throat competition, some dealers or banks are deliberately distorting the market.

The sad part of this practice is that the exchange rate has wider implications beyond making a quick buck in one or two deals by the concerned dealers or banks. When the kwacha exchange rate is distorted or manipulated, the cost of living and that of doing business in Malawi will go up as, for example, fuel pump prices under the automatic pricing mechanism will go up as will prices of other goods and services.

Whereas RBM is enforcing its code of conduct among financial market dealers, I would love the dealers, if possible, through their esteemed Financial Market Dealers Association (Fimda), to publicly explain the factors contributing to the fall of the kwacha through a statement.

This is important, especially considering the impact of a depreciating currency and the fact that the dollar itself is being battered on the international market.

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