The kwacha, which has been on a free-fall since September when tobacco sales closed, has slightly appreciated against the dollar buoyed by minor export proceeds from some of the country’s commodities, Reserve Bank of Malawi (RBM) confirmed on Thursday.
The local unit weakened by more than 25 percent since September 2014 when sales of tobacco—the country’s main foreign exchange earner—closed at the end of August, resulting in commodity price rises.
As of yesterday, according to the RBM financial market development report, the kwacha appreciated against the dollar and South African rand, but depreciated against the euro and British pound.
Indicatively, the kwacha traded around K492.3047 against the dollar on Wednesday, said the RBM from a high of K520 some few weeks back. In some authorised dealer banks (ADBs), the kwacha was on Thursday trading at between K505 and K508 to a dollar.
The appreciation of the local unit is a boon for the Malawi economy because it could result in stabilising fuel prices, which are dictated by the exchange rate, and the easing in inflation rate, currently at 23.3 percent as of October 2014, according to the National Statistical Office (NSO).
RBM data show that gross official reserves—held in the custody of RBM to prop up the kwacha—increased to $478 million or 2.5 months of import cover during the week ending December 5 from $352 million or 1.84 months of import cover. At the same time, private sector reserves, which constitute reserves under the direct control of ADBs and foreign currency denominated accounts balances, jumped to $309 million or 1.62 months of import cover from $297 million or 1.56 months of import cover the week before, according to the RBM.
The monthly import cover calculating figure is at $191 million.
Explaining the slight appreciation, RBM spokesperson Mbane Ngwira told Business News yesterday the kwacha is responding to local economic developments such as the tightening of monetary policy and other instruments like liquidity reserve requirement (LRR) for forex deposits.
Following the directive on LRR—a fraction of deposits that commercial banks keep with central bank currently at 15.5 percent—the reserves on forex deposits are to be made in kwacha and not in their respective currencies.
“We have ensured that commercial banks should avail the market with forex that is there. The demand [for forex] that was there has been covered by the forex that is available on the market,” said Ngwira.
He explained that minor export proceeds from sugar, tea and pulses have boosted foreign exchange reserves, stressing that the level of forex from tobacco only lasts two months.
In mid-November, Minister of Finance, Economic Planning and Development Goodall Gondwe said government was working out on something he could not mention to stabilise the kwacha.
He could not be reached Thursday to explain what measures have been instituted to stabilise the local unit.
Mid this year, the Economist Intelligence Unit (EIU) projected that the kwacha will average K422 to a dollar this year, an estimate Financial Market Dealers Association (Fimda) agreed with.
Earlier, Fimda president Alfred Nhlema said the market was settling import bills and that the situation was manageable, observing that the economy was not sitting on import bills arrears and given both market and non market (moral suasion) interventionist measures, the authorities should be able to manage the fluctuations.
Malawi, an agro-based economy, experiences seasonality in the foreign exchange market, and the depreciation of the currency follows the seasonal nature of the market, with the period between September and March being a lean supply period largely due to the closure of the tobacco sales and is characterised by heavy importation of agricultural inputs such as fertiliser and fuel.