Investment management and advisory firm, Nico Asset Managers, says the Malawi kwacha is likely to start losing ground against foreign currencies after the end of the tobacco selling season.
In its April 2013 Economic Report, Nico says the situation can only be saved if the country identifies additional sources of foreign exchange.
“Sustainability of the exchange rate stability will be key especially post-tobacco season,” reads the Nico Report issued Monday.
It adds: “The medium-term prospects, however, entail a possible depreciation of currency unless the economy realises additional stable and significant sources of forex.”
According to Nico, the country’s considerably wide current account deficit, forecast at US$375 million in 2013 from US$513 million in 2012, and weak Foreign Direct Investment (FDI) also provides for further depreciation of the currency.
“Constant increase in the external debt will also negatively affect the exchange rates as forex will be depleted in an effort to finance debt,” says Nico.
It further says a weakening currency will increase external liabilities for companies that have foreign currency debts on their balance sheet.
“Weakening of the currency will also result in soaring inflation, hence reducing disposable income and increasing the cost of capital as authorities increase interest rates to contain the rising inflation.
“Depreciation of the kwacha will result in reduced demand for forex hence improving forex availability,” said Nico.
Nico Asset Mangers says, however, the on-going proceeds from the tobacco market will continue to help stabilise the value of the currency in the short-run as supply of forex will increase.
Tobacco revenue have significantly boosted the local unit in the past couple of weeks, leading to the kwacha gaining some ground against the dollar from an all-time high of K430 per dollar to around K390.
As at the close of business on Friday, a total of 51.6 million kilogrammes of tobacco had wired in a total of U$93.2 million.
The volumes sold represent about a third of the country’s tobacco crop this year with production pegged at 156 million kilogrammes.
Over the past weeks, the country’s authorities have been smiling at the appreciating kwacha, arguing the economic recovery initiative put in place has started bearing fruits.Follow and Subscribe Nyasa TV :