Troubled kwacha sheds off 3.21% in five months
The kwacha continues to face pressure with data showing it has lost 3.21 percent against the dollar between January and May this year.
This, according to analysts, is an indication that demand for foreign exchange continues to surpass supply.
Reserve Bank of Malawi (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 at a time the tobacco marketing season in which the country traditionally has more foreign exchange flowing into the market is in progress.
Meanwhile, figures from the AHL Group show that the country has realised $83.2 million (about K66.8 billion) from the sale of 50.7 million kg of tobacco at an average price of $1.64 (about K1 316.92) per kg in seven weeks of tobacco sales.
This represents a 33.5 percent increase in the earnings when compared to $63.2 million (about K53.1 billion) realised during the same period last year.
However, RBM daily money market data indicate that the official gross foreign exchange reserves have generally 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 1.66 months of import cover from $662.98 million, an equivalent of 3.17 months of import cover. The recommended minimum threshhold is three months import cover.
In an interview on Wednesday, market analyst Cosmas Chigwe observed that the continued kwacha depreciation amid the tobacco season reflects demand and supply imbalances.
He said the main reason for the depreciation is the opening up of economies in the wake of Covid-19 vaccinations which has resulted in the resumption of most imports in the country.
He said “The re-opening of these economies has increased ability to import and subsequently the demand for foreign exchange.
“This demand should be expected to be even higher in the third quarter resulting in further pressure on the kwacha.”
On his part, Financial Market Dealers Association of Malawi president Mclewen Sikwese attributed the development to the sustained supply and demand imbalances which 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.”
Cedar Capital Limited, in a market brief issued recently, also indicated that 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 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.”
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.
