Malawi kwacha threats loom after tobacco revenue slump: Forex shortage hits

Threats to the Malawi Kwacha loom due to seasonal surge in demand for imports.

A financial analyst says the growing demand is a normal seasonal occurrence.

This week the local unit showed it was slowly but surely losing its two-year long grip, losing ground against major trading currencies.

The gradual fall in the currency, while seen as seasonal contrasts sharply with the last two years of the former  Democratic Progressivr Party (DPP)  administration when it remained stable while imports grew.

While authorized dealer banks quoted the MWK as trading at K739.527 to the US dollar and K44 against the South African rand, the reality is that they will soon start to ration.

The move is in preparation for the lean forex season.

On the black market, traders quoted the Malawi Kwacha at 800 against the US dollar and 50 against the Rand.  The local currency has also marginally lost its grip against the British pound, trading at 944.793 from around 937 last month.

“We’re in the demand season. With farming about to reach its peak, the country is importing a lot of fertilizer and other inputs. At the same time most of the trading partners, including South Africa are opening up their borders after the Covid-19 lockdown. This will pile pressure on the Kwacha as the demand curve for foreign currency grows to match imports,” said one financial dealer in Blantyre, the country’s banking and financial services hub.

Production of tobacco, Malawi’s major foreign currency earner fell by 31.3% this year on account of too much rain, the Tobacco Commission said earlier this month.

The slump in production triggered a 26.4% decrease in the tobacco seller’s revenues. That led to revenue from tobacco sales falling to US$174.5M compared to US$237M in 2019, said the auctioneer AHL.

Tobacco accounts for about 50 to 60% of Malawi’s total foreign currency earnings and roughly 15% of GDP.

Malawi’s forex spring occurs during the tobacco selling season when inflows of US dollars is high and demand for imports traditionally low.

The forex spring tends to dry in the summer as the  imports curve rises.

President Lazarus Chakwera, in his first State of Nation Address in Parliament called for concerted efforts to diversify Malawi’s reliance from tobacco to ensure economic sustainability.

Meanwhile, according to press reports, some manufacturing companies have scaled down their production as they cannot import raw materials due to the shortage of foreign exchange in the country’s commercial banks.

On Wednesday, Malawi Confederation of Chambers of Commerce and Industry head of membership development and communication Tione Kafumbu called for urgent action to address the forex situation.

In the second quarter ending June 2020, Reserve Bank of Malawi indicated that official foreign exchange reserves dropped to $646.4 million from $699.9 million recorded in the previous quarter.

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