Malawi’s demand for forex puzzles Chuka

Reserve Bank of Malawi (RBM) Governor Charles Chuka has expressed surprise at the country’s monthly consumption of foreign currency, especially the dollar.

Speaking at a cocktail RBM and Association of Business Journalists (ABJ) organised in Lilongwe, Chuka said Malawi is consuming $200 million (about K60 billion) in a month which is higher than the country’s annual earnings from tobacco for this year.

This year, Malawi earned $177 million (K55 billion) from tobacco which is about 40 percent lower than $293 million (K89 billion) the leaf fetched in 2010.

“This country is demanding a lot of dollars. We are consuming $200 million a month when our exports [proceeds] are not even half of that. This is not sustainable,” said Chuka.

Such a huge demand for foreign currency coupled with the country’s low export base can prolong Malawi’s foreign exchange drought in the short to medium term.

Malawi needs adequate foreign currency to meet its imports bills, service foreign debt and pay government expenditures overseas, among others.

Sustained availability of foreign reserves also strengthens investors’ confidence, foreign direct investment (FDI) and portfolio investment, an entry of funds into a country where foreigners make purchases in the country’s stock and bond markets.

“There is a friction at the moment. More dollars are coming through FCDAs [foreign currency denominated accounts] and we see a lot of NGOs using these FCDAs. The situation [forex availability] has improved,” added Chuka.

Chuka argued that although the Malawi economy is sitting on a one-month import cover, that reserve position is different from the previous one which struggled to clear huge arrears.

The governor also banked his hopes on the recently implemented economic reforms which he said need more time for their taking effect.

“We will continue with the present monetary policy direction because we are satisfied. But we are also conscious of political risks. Reforms are so significant and are working, let us give them a chance,” he said.

Chuka, however, recognised the need for the country to narrow its trade balance—gap between imports and exports—and also ensure that it diversifies away from tobacco to other crops to generate more foreign exchange.