Pressure on Malawi kwacha to persist
Despite the appreciation of the kwacha, which has gained about 5.5 percent against the dollar in December alone, pressure on the local unit still exists, an investment advisory firm has said.
Nico Asset Managers Limited, in its December 2014 economic report, said although some level of stability is expected on the foreign currency market in light of the recent policy changes that have been implemented and the buffer created by the foreign exchange reserves, aid suspension still threatens the stability of the local currency.
The firm said in the medium to long-term, the kwacha may depreciate due to low forex levels, trade imbalances and current account deficits.
In the wake of the suspension of aid due to Cashgate—the looting of government funds at Capital Hill— and after the closure of last year’s tobacco marketing season, the kwacha lost a quarter of its value against the dollar within four months, compelling the Reserve Bank of Malawi (RBM) to implement tight monetary policies.
Due to the polices, such as the sale of $200 million (K96 billion) debt to PTA Bank, tightening of monetary policy and other instruments like liquidity reserve requirement (LRR) for forex deposits and forex receipts from some export commodities such as tea, sugar and pulses, the kwacha has since December 2014 been appreciating against the dollar.
At the same time, gross foreign exchange reserves have risen to an equivalent of about 3.2 months of import cover as of January 9, which is the internationally recommended level of foreign exchange reserves cover.
But Nico Asset Managers has cautioned that the continued withholding of aid by the country’s main donors will impact on the availability of forex and the continued weakening of the kwacha, pushing up inflation, which his currently at 23.7 percent as of November 2014, according to the National Statistical Office (NSO).
The Nico Asset Managers December report has warned that the country’s weak export base leads to a trade deficit with imports dwarfing exports.
The firm has said the situation would likely affect the kwacha stability against major trading currencies.
However, the report has said the availability of forex reserves above three months of import cover may mitigate some of the pressures on the local currency.
On the other hand, RBM is optimistic, pointing out that the outlook on the kwacha is promising.
The local firm has also warned that the prevailing high interest rates—with prime rates ranging between 37 percent and 39.5 percent—may result in slow down in private sector growth and a decrease in capital investments.
