Sometimes Media reports can over exaggerate the impact of an event and make the public start believing in something that is not true, such as lately media has been reporting that the Malawi kwacha, which lost substantial ground in the past three months against major trading currencies, has continued to gain value against the dollar and rand, thanks to the pick-up in foreign exchange reserves.

 

in a time where world oil prices have declined by over 40% and Reserve Bank of Malawi (RBM) financial market development report for Monday shows that gross official reserves—foreign reserves under the direct control of the central bank—are now at $586.11 million, an equivalent of 3.07 months of import cover. Why was the Kwacha declining?

According to Financial analysts the local unit has lost more than a quarter of its value since the sales of the main foreign exchange earner, tobacco, closed at the end of August.

According to the same experts Malawi, an agro-based economy, experiences seasonality in the foreign exchange market, and thus the depreciation of the currency follows the seasonal nature of the market.

The time between September and March is a lean supply period largely due to the closure of the tobacco sales and is characterized by heavy importation of agricultural inputs such as fertilizer, which tend to inflate the import bill, putting pressure on the local currency.

However this is an exceptional year following a decade of rising prices, Oil prices started dropping at an accelerated rate and should have absorbed whatever the normal effects that follow end of the Tobacco period.

On the other hand, private sector reserves—foreign reserves under the direct control of authorised dealer banks (ADBs), consisting of ADBs own forex position and foreign currency denominated account balances of clients—were recorded at $345 million or 1.81 months of import cover.

This means that, in total, the country is sitting on forex reserves amounting to $931.24 million or 4.88 months of import cover. With all this good financial news the Kwacha should appreciate more against major currencies such as the Dollar and the Euro. So let’s stop with the victory laps we are currently taking until the kwacha is let’s say trading at around K300 to the dollar.

Currently the local unit is trading at around K470 against the dollar, according to RBM, but is trading between K480 and K496 against the dollar in some ADBs.

RBM spokesperson Mbane Ngwira said the kwacha is responding to local economic developments such as the tightening of monetary policy and other instruments like liquidity reserve requirement (LRR) for forex deposits and foreign exchange receipts from some export commodities such as tea, sugar and pulses.

Following a directive on LRR, the reserves on forex deposits are being made in kwacha and not in their respective currencies.
We have ensured that commercial banks should avail the market with forex that is there. The demand [for forex] that was there has been covered by the forex that is available on the market he said.

Analysts argue that the economy is, at the moment, not sitting on import bills arrears, but said the depreciation of the kwacha was, to some extent, due to speculation. The question is who was doing the Speculation and why?

In his State of the Nation Address last week, President Peter Mutharika said now that the kwacha has since stabilized, the currency may even appreciate soon, because we are doing everything possible to get the economy on the right track.

The President was right but it is not yet time to take victory laps. Government needs to work harder because a stronger Kwacha is good for all Malawians.