Pains of Kwacha volatility

For businesses operating in Malawi, the tumbling Kwacha has been nothing but a burden and pain as they are grappling with higher costs and weaker consumer demand.

The currency volatility has left the traders— including motor car dealers, household items traders, second hand items traders and general items traders—struggling to remain afloat..

Malawi, being a net importer, the situation has thus left the businesses scratching their heads as they have to raise more kwachas to finance for the same consignment of goods in the wake of a weakening kwacha.

Presently, Data from the Reserve Bank of Malawi (RBM) show that the kwacha has lost 3.21 percent against the dollar between January and May. 

This according to analysts is an indication that demand for foreign exchange continues to surpass its supply.

The RBM data on forex bureau exchange rates as published on its website, indicate that the kwacha has retreated from an average K778 in January to K803 presently. 

The worsening depreciation of the kwacha comes despite the tobacco marketing season in which the country traditionally has more foreign exchange flowing into the market. 

But currently, daily money market data indicate that the official gross foreign exchange reserves have also declined.

According to the RBM figures gross official reserves—under the direct control of RBM—dropped between May 2020 and May 2021 to $414.41 million an equivalent of 1.6 6 months of import cover from $662.98 million an equivalent of 3.17 months of import cover.

In view of the development, both small and large businesses are left counting the cost of the weak kwacha.

For Esther Chimwendo, a second hand clothes trader based in Blantyre, the negative effects of the depreciation of the Kwacha are that they have not made any notable profits in recent months when compared to late last year and even earlier this year.

According to Chimwendo, the market is now distorted and planning is proving to be difficult for traders.

She said: “The depreciation and the non-availability of foreign exchange on the market from time to time  is making our business difficult because we cannot even plan for our business.

“The amount we used to purchase the same items a while ago is not the same today. This is making it even harder to maintain or get new customers because we are also forced to raise our prices but our customers are not ready for such price adjustments.”

For another Blantyre based motor car dealer Brian Kayuni sales of vehicles and spare parts have significantly declined in recent times because of the depreciation of the Kwacha.

“Comparing vehicle sales at the same time last year, I lost a lot of money because I have opted to stop bringing cars into the country now. 

“What is happening is that if we tell a customer the price of a car, say K7 million at the time of order, by the time they are coming they find the price has gone up to K9 million. They feel ripped off and the end result is we have to bear that cost,” he said.

Similarly, a trader in household items, men’s clothing and fashion accessories Brenda Nampeya said she is registering a lot of losses in her business in view of the Kwacha instability.

“We are only hoping for a stable Kwacha because what is currently happening now will definitely push us out of business. We are selling goods at a loss just to maintain our customers but the reality is we can go on this way,” she explained.

Across the country, scores of Malawians yearning for new outfits, kitchen ware, electrical appliances and several other household items turn to Chinese shops which have over the years given Malawians a better deal in items of fair pricing.

“China shops have been what I can describe as one of the best business partners due to their fair prices. We actually buy things from china shops and sell them in our locations.

“But I have noted prices are rising from time to time and I have had no choice but to break from the business,” says Bernadetta Mtegha, another Blantyre based business lady.

Prospects going forward

The currency, according to Blantyre-based Cedar Capital Limited, though a positive turn is expected on the domestic market, the pressure on the local unit may not ease.

The firm’s chief executive officer Armstrong Kamphoni in an interview observed that there is a backlog of demand for forex in the banks hence the factors that traditionally impact on forex availability may not be enough to offset the kwacha situation.

He said: “There has been over 30 percent drop in reserves over the 12 month period due to demand for forex being higher and that’s not factoring in any purchase of vaccine. Gross official reserves have dwindled further this far.  

 “We thus do not think the tobacco season will bring enough to plug the holes and stabilise the kwacha. Unless there are significant injections from donors who are not always in a hurry to splash – a situation that might be exacerbated by their own Covid-19 imposed economic problems.”

Financial Market Dealers Association president Mclewen Sikwese who attributes the development to the sustained supply and demand imbalances fears the imbalances will in the medium term continue to exert pressure on the kwacha.

He said:” With the reserves position low and the existing backlog of foreign exchange bills in the market, the prospects of an appreciation of the kwacha remains remote.

“We are more likely to see a marginal depreciation of the kwacha than an appreciation post the tobacco season.”

Treasury is however upbeat that the local unit will soon gain stability to trade at K780 to a dollar banking on the fact that economic prospects for Malawi are showing signs of recovery following the declining Covid-19 pandemic cases and steady progress in rolling out the vaccine.

Meanwhile the RBM has indicated that it will not maintain a fixed exchange rate regime but will allow flexibility in the movement of the local currency going forward saying it will not allow the local currency to be fixed against other international convertibles.

RBM governor Wilson Banda told Business News earlier that the central bank is mindful of the fact that a runaway exchange rate is not ideal for the economy as it is harmful and is monitoring what is happening with the exchange rate in the region.