Malawi Kwacha currency bucking the trend… for now
In the last six to eight months, most emerging and frontier currencies have weakened against the US dollar. One explanation is the likelihood of the US Federal Reserve raising rates at its September policy meeting, making US assets comparatively attractive. Meanwhile, the possibility of a ‘Grexit’ is exacerbating the need for investors to buy safe haven assets, of which dollar assets are among the most sought after.
However, some EM currencies have bucked this trend. The Malawian kwacha is one. Indeed, it is the only African currency to have strengthened this year, as shown in the bar chart below:
For a country that is largely dependent on tobacco as its main export, one has to wonder why the Malawian kwacha has strengthened against the greenback.
Late last year the Reserve Bank of Malawi (RBM) took some aggressive steps to address what had been a persistent weakening of the currency. Firstly, it sold $200m of government securities to the Preferential Trade Area Bank, a regional development institution, to help shore up the central bank’s foreign reserves. Little was made known about the tenure and interest rate of the bonds, although it is known that they will be repaid in local currency.
The jump in reserves to $646m in Q4 2014 represents an almost 50 per cent increase from the previous quarter, giving the RBM greater ability to supply the market with dollars. Unfortunately, this is a one-off increase and reserves will fall again when the bonds become due. It is likely that reserves will settle back to the $350m mark, giving import cover for just two months.
The second measure adopted by the RBM was allowing local banks to hold their reserve requirements in local currency, rather than in dollars as was previously the case, thus freeing up dollars within the financial system.
In addition, export proceeds from tobacco, together with relatively tight monetary policy, will help support the kwacha. However, we ask ourselves if this strength is likely to persist.
We believe that when the inevitable finally happens and the Fed raises rates, most currencies will gyrate in the short term. Despite the efforts of the RBM, the kwacha will feel the pinch. With limited options to fight a pending tidal wave of capital outflows, the sensible option would be for the RBM to maintain its tight monetary stance to at least limit the damage. However, this will be particularly challenging given this year’s delayed start to the rains and the floods that will likely weigh down on growth. It would be interesting to see if the RBM loosens the reins soon in anticipation of a hike in the last quarter of the year.
- Neville Mandimika is African macroeconomic equity strategist at Atria Africa, an asset management and corporate advisory firm focused on sub-Saharan Africa.
@Bokonomiks (5) just like banks are free to use local currency deposits to make loans and other payments, they also use foreign currency deposits for other things. You can observe commercial banks’ own foreign exchange reserves have been in negatives meaning they are using part of customers deposits for payments. That is normal banking as long as they observe exposure limits.
The history trend shows import cover strengthening from Q3 to Q4 every year with 2014 being exceptionally well. What I don’t understand( as a layman) is the measure adopted by RBM of keeping the reserves in kwacha than in Dollars to free the Dollar within the Financial system. What is the use of this strategy if it will fail to help cushion the kwacha when Federal Reserve raises its rates therefore forcing the import cover down to 2 months? Educate me here. Secondly in the prevailing circumstances where money laundering is on the rise where people are trading the foreign… Read more »
Keep it up Neville Mandimika where ever you are(I presume you aren’t in Xenoland)). Most of the columns to do with Economics we get from the social media aren’t understood by the majority including me a standard 3 drop out at Zomba Boys Primary,PO Box 267,Zomba. They are normally full of professional in house English which makes the whole story junk news. Yours is well written and understood. Hahahahahahahahaha!
Thats what we except the good governance…..keep it up
Pamene ena akumayamikira za mphamvu ya Kwacha ife amenenso takhala tikutsatiranso bwino ndalamayi mwaumbuli tawonapo chimodzi chomwe tinganene:ndalamayi imapatsidwa mphamvu nthawi yokhayo yomwe alimi akugitsa fodya.Mkuganiza kwathu kwaumbuliko ndikwakuti a RBM amapanga dala cholinga alimi alandire makwacha ochepa pa US$,chodabwitsa kwambiri anzathu omwe amwa ink kwambiriwa kwawo ndikuyamikira kuti chuma chagwira mnseu.Muwona pompano malonda a fodya akatha aibwenzeretsanso pamalo ake.Ife osaphunzirafe timvekere ndalama yagwa.Bwanji mitengo yazinthu siitsika ndalama ikapeza mphamvu? Izo ndiye ntchito za anthu ophunzira.
Observation of foreign currency LRR in local currency does not free up any foreign currency for payment of import bills. LRR is observed on customer deposits and are thus customer funds which banks cannot trade on/foreign payments. Lets be very clear on that, dont just take the central bank’s statement as the gospel truth; interogate the statements.
Jargon buster needed here. Couldn’t understand half of the article.
Good article please post more articles such as this that provide an insight in Malawian economy, since our Chancellor College economic commentators love to only talk politics and stupid things.
This kind of analytical piece on the economy should be a regular column on the site, or any other site in Malawi. It does answer some important questions I had, mainly about the reasons behind the extraordinary warrior stance by the Kwacha. Especially outside the tobacco season. And I have been observing the currency for many years.
good leadership is judged by its fruits