Investment and advisory firm Nico Asset Managers says it expects the rate of depreciation of the kwacha to moderate in the short- term on account of increasing foreign investment inflows and earnings from the agricultural sector.
The kwacha has in the past eight months depreciated against major trading currencies due to increased demand for foreign exchange, according to analysts.
In the just-ended year, the local unit traded at its lowest, shedding 4.33 percent against the dollar to K770 due to the decline in foreign exchange supply, which exerted pressure on the country’s foreign exchange reserves.
In its Monthly Economic Report for January 2021, Nico Asset Managers said it expects the kwacha, which recorded a mild depreciation and traded at K771.20 per dollar as of end January 2021 from K770.84 in December 2020, to experience a mild depreciation going forward.
Reads the report: “During the lean season, there has been less gross official and private sector reserves flowing into the market. This has increased the burden on the RBM [Reserve Bank of Malawi] to support the foreign exchange market with liquidity to help either in smoothening the rate of depreciation or payment.
“But now that the economy is past the period of high demand of forex as most of the Affordable Inputs Programme importations have already been distributed to about 90 percent of its beneficiaries, the pressure on the kwacha will ease.”
In Malawi, during the lean season, there is less foreign exchange coming into the market and at the same time, there is high demand for foreign exchange as farm inputs such as fertilisers are imported.
RBM figures show that gross official reserves—under the direct control of RBM—dropped between January 2020 and January 2021 to $502.98 million (or 2.41 months of import cover) from $786.71 million (or 3.76 months of import cover).
The drop in the reserves position, according to analysts, is a reflection of the increasing burden on the central bank to support the foreign exchange market with liquidity to help either in smoothening the rate of depreciation or payment.
Financial Market Dealers Association president Mclewen Sikwese in an earlier interview also projected that since the country now is past the foreign exchange demand and that soon the tobacco marketing season will start, the foreign exchange position and kwacha prospects look good in the short-term.