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Malawi kwacha continued gain good for importers

Table showing the changes in exchange rates
Table showing the changes in exchange rates

The kwacha has continued its marginal appreciation against the country’s four major trading currencies buoyed by trickling tobacco earnings, a development that could make imports affordable and probably result in lower fuel prices, according to an investment advisory firm.

The easing in the price of fuel, determined by the movement of the local currency either way since the adoption of the automatic pricing mechanism in May 2012, could lead to a reduction in inflation, currently at 23.9 percent as of April 2014, which in turn will leave households with more disposable income to spend.

In its monthly economic report for April 2014, Nico Asset Managers Limited indicated that in the review month, the local unit appreciated 2.7 percent against the dollar, 1.6 percent against the pound, 4.2 percent against the rand and 4.7 percent against the euro.

“The exchange rate is expected to continue appreciating as proceeds from tobacco continue to pour into the country,” said the firm in the report.

Currently, in the seven weeks of sales of tobacco, which wires in more than half of the country’s foreign exchange earnings, revenue peaked at $68 million, 19 percent year-on-year increase from $57 million same period last year.

The Reserve Bank of Malawi (RBM) is controlling the movement of the currency to create stability by buying foreign exchange from the market to continue building up international reserves to smoothen the seasonal volatility in the exchange rate while building a buffer for the lean season.

RBM figures show that as at April 30 2014, foreign exchange reserves eased to $751 million, about 3.99 months worth of import cover compared to $759 million, which is 4.04 months of import cover a month before.

Out of the total reserves, $447 million was the official reserves held by the central bank, representing an import cover of 2.38 months and $304 million, an equivalent of 1.62 months worth of import cover, was with the private sector.

The RBM is maintaining the gross official foreign exchange reserves at higher levels, close to the recommended three months import cover.

“There are risks on the currency emanating from the uncertainty on donor funds and election- related spending. Overall, the kwacha will appreciate in the short-term, but the medium to long-term view is that the currency will depreciate due to trade imbalances, current account deficits and significant levels of imports,” said Nico Asset Managers.

Malawi which has a narrow export base, heavily relies on exports and donor aid for foreign exchange inflows.

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