Pressure persists on Malawi Kwacha
Pressure continues to mount on the Kwacha, barely two months after the authorities devalued it by 25 percent. Centre for Research and Consultancy Director Milward Tobias said the problem that Malawi has is that it has a scarcity of forex and that that has to be addressed by improving supply of foreign exchange in the formal economy. In its end of mission report…
Pressure continues to mount on the Kwacha, barely two months after the authorities devalued it by 25 percent.
A snap survey by The Business Times in Malawi’s Administrative Capital Lilongwe revealed that the forex black market continues to flourish with the dollar now selling at around K1,400 from around K1200 in recent weeks.
This is despite the green buck trading at K1,030 in high street banks.
A black market operator on Monday told us that despite the devaluation, the formal financial system has struggled to attract the dollars.
He said as a result, enterprises are not able to find quick dollars in banks, thereby relying on the forex bureaus and the black market where it comes at a premium.
The survey also revealed that the green buck was trading at an average rate of K1400 to the dollar in forex bureaus.
Centre for Research and Consultancy Director Milward Tobias said the problem that Malawi has is that it has a scarcity of forex and that that has to be addressed by improving supply of foreign exchange in the formal economy.
“I said it then and I repeat, for as long as there is scarcity the black market will have its rate far higher than that in the formal economy so that they remain in business.
“The issue of devaluation as a way to move forex from black market to formal economy is a theory of below-average brains,” Tobias said.
In its end of mission report last month, the International Monetary Fund (IMF) hailed Malawi for taking steps to normalise the forex market in line with the recommendations of Article IV Consultation concluded by the IMF Executive Board in December 2021 to help to improve foreign exchange availability.
In its latest Malawi Economic Monitor, the World Bank noted that if supported by adequate macroeconomic and structural policies, the 25 percent exchange rate adjustment has the potential to make foreign exchange more widely available by both attracting foreign exchange supply through increased purchasing power and constricting demand for foreign exchange by making it less affordable.
“Urgent action was needed to reverse the trend of declining official reserves, which have reached their lowest level in recent years. Gross reserves decreased to less than half, from $847 million in December 2019 to US$385 million in March 2022, or around just 1.5 months of import coverage .This is much lower than the recommended adequacy level (3.9 months of import coverage) for a credit-constrained economy (IMF, 2021).
“Net reserves have been negative since February 2021, except when Malawi benefited from the IMF’s SDR allocation (August – September 2021). The RBM has supported Malawi kwacha stability through substantial foreign exchange swaps (both new and rollovers) and medium-term borrowing facilities to maintain the reversion to a stabilized exchange rate regime, despite a de jure floating arrangement (IMF, 2020),” reads the MEM.
While reserves have also been affected by poor export performance and the rising costs of imports, relinquishing some control of the exchange rate has the potential to support the build-up of official reserves.
“The RBM intends to become a net buyer of foreign exchange in the market and recent announcements commit it to move toward a managed float regime,” the World Bank said.
As at June 30, 2022, Malawi’s gross official reserves were seen at $415.73 million or 1.66 months of import cover.
Reserve Bank of Malawi Spokesperson Ralph Tseka was not immediately available for comment yesterday.
But Finance Minister Sosten Gwengwe recently rubbished claims from some quotas that Malawians should brace for another devaluation following the 25 percent currency depreciation late May.
“It is very saddening hearing from some other Malawians scaring the market and everyone else that there will be another devaluation. That is coming from people who don’t wish the country well.
“If they were people who are well enlightened and know what they are talking about, they should have refered to the Article IV Consultation that the IMF released in December 2021 which clearly said that the misalignment of the kwacha was at 25 percent,” Gwengwe said.