Malawi kwacha free-fall not surprising—analysts

The continued free-fall of the Malawi kwacha is not surprising because the local unit is responding to forces of the market which has a huge foreign exchange deficit, economic commentators have said.

Malawi’s gross official reserves have sunk to a low of $180 million (K66 billion, at the current exchange rate), an equivalent of 0.96 months of import cover, according to the Reserve Bank of Malawi (RBM) latest statistics, which is way below the internationally recommended three months minimum of import cover [$564.3 million].

In recent weeks, the kwacha has continued to weaken against all major currencies, and it is currently trading at K365 to a dollar, K589 to a pound, K401 to rand and K518 to euro, as of Wednesday, in authorised dealer banks (ADBs).

On the parallel market in Blantyre on Wednesday, the dollar was trading at K420 and the rand at K45.

Rapid fall

The rapid fall of the kwacha could be an indication that foreign currency is in short supply since traders deal in hard cash only.

The Reserve Bank of Malawi (RBM) devalued the kwacha by nearly 50 percent and adopted a market-determined exchange rate in May 2012 to meet conditions set by the International Monetary Fund (IMF) for resumption of donor aid which accounts for about 30 percent of the budget.

Since the kwacha was devalued, it has continued to plummet and, by December 2012, it had dropped by 104.7 percent against the dollar, according to analysts’ estimates.

Economist Dr. Colleen Kaluwa, a lecturer at University of Livingstonia, said on Wednesday said Malawians should not be surprised with the behavior of the kwacha since it is just responding to market forces.

“It is a question of demand and supply. The demand for foreign exchange is outstripping the demand; hence, fueling the continued fall of the kwacha,” he said.

Kaluwa said unless the RBM intervenes by way of injection of hard cash in the market, the kwacha will continue to fall.

“Malawi is an agro-based economy, and most of the foreign exchange is generated when sales of tobacco resume. The economy will get respite when it starts earning dollars which will result in kwacha stabilising,” he said.

The Consumers Association of Malawi (Cama) executive director, John Kapito, said when the kwacha is floated, it responds the availability of foreign exchange reserves an economy has.

“The adequacy of reserves is a necessary and sufficient condition for currency floatation and Malawi has no such reserves to warrant the floatation of the kwacha. Malawi should have started addressing the problem of a perpetually precarious foreign reserves position before adopting a flexible or floating exchange rate regime,” he said.

Payment arrears

Before the kwacha was devalue and subsequently floated, Malawi had accumulated foreign payment arrears, and Kapito said authorities could have cleared the foreign payments before embarking on a free exchange rate regime.

Nico Asset Managers Limited, in its annual report, said since the adoption of the market-determined exchange rate regime, the kwacha has continued to weaken.

“The kwacha is, however, showing signs of stabilisation with the rate of depreciation slowing down since September 2012,” reads part of the report.

Malawi heavily relies on tobacco, which wires in more than half of the country’s foreign exchange earnings, for much of its hard cash.

Last year, earnings from the leaf slumped 40 percent to $177 million (K65 billion) from $293 million (K106 billion), and since the closure of the tobacco sales, forex reserves were on the decline until mid December when close to $100 million (K37 billion) inflow was recorded, according to Nico Asset Managers Limited.

At the end of 2012, said RBM, total foreign exchange reserves stood at $446 million (K163 billion), an equivalent of 2.37 months worth of import cover.

This compares to $355 million, an equivalent of 1.89 months worth of import cover, at the end of 2011.

The RBM last September revised upwards its monthly forex consumption to $188.1 million (K69 billion) per month from $129 million (K47 billion) a month. The required level of forex for Malawi is the equivalent of 3 months (about US$564.3 million).

Worst performing currency

Last week, an online business publication, Bloomberg noted that kwacha was the worst performing currency in 2012, and has dropped to its lowest in a decade.

According to data compiled by Bloomberg, the kwacha has fallen seven percent since January, and is at its weakest since June 22 1993.

Last September, RBM Governor Charles Chuka told the Association of Business Journalists (ABJ) that the continued depreciation of the kwacha is not a cause for concern, arguing that what is scary is for people to lose their hard cash when the local unit starts appreciating at a time tobacco dollars, start trickling into the system.

Chuka recalled how those who were hoarding the US dollar suffered at a time the kwacha appreciated.

“In the 1990s people learnt these lessons. They pushed the currency very far, but they had to pay the price eventually because the price appreciated.

“So people who know these things will be very careful. But, the RBM, having given the powers to deal with the exchange rate market, will have to intervene at some point,” he said.

But Chuka, kwacha will continue to depreciate, but not to the levels that it will be almost impossible for the RBM to manage.

“The monetary situation is under control. We can manage the movement of the kwacha by controlling the money stock in the system,” he said.