Forex Shortage Hits Malawi

President Lazarus Chakwera’s Tonse Alliance government has completely lost grip of the country’s economic recovery.

This comes as Malawi’s foreign exchange reserves continue to shrink, with latest figures from the Reserve Bank of Malawi (RBM) showing a U$54.5 million drop of the reserves in a month.

The data shows that total foreign exchange reserves, dropped to U$592.1 million or 2.4 months of import cover as at end of March from US$646 million, an equivalent of 2.6 months of import cover in February.

During the same period, last year, total foreign exchange reserves stood at US$766 million, an equivalent of 3.1 months of import cover.

Financial Market Dealers Association of Malawi president Leslie Fatch has since urged authorities to devise ways to improve trade balance where focus should be on import substitution, managing consumer appetite for imports, industrialisation and promotion of exports.

“Much as we want the quick wins, we have to understand that the solutions will not have an immediate impact and we have to manage our expectations on the same,” said Fatch.

Malawi is currently reeling from forex shortages, a situation which is affecting importation of basic and crucial items, according to the Malawi Confederation of Chambers of Commerce and Industry.

This is despite the 25 percent devaluation of the kwacha effected in May last year, which was meant to align the foreign exchange supply to the macroeconomic fundamentals and bring foreign exchange into the formal market.

But analysts say the supply and demand imbalances have been prevalent on the domestic foreign exchange market evidenced by low foreign exchange supply, declining official foreign exchange reserves and widening spread of rates on the market.

In November, the World Bank urged authorities to implement measures that can boost its foreign reserves position by enhancing private financial flows, especially from foreign direct investment and remittances, while gradually reducing aid dependence.

In response to the forex crisis, the RBM has introduced a number of measures to ensure foreign exchange availability in response to the tightness in the foreign exchange market.

The RBM, effective May 17, re-introduced customs declaration forms for exports to help track forex flows with some stakeholders, arguing that the move could fuel tax evasion.

According to RBM Governor Wilson Banda, the measure will ensure that all export earnings are repatriated to Malawi.

Under the new measure, he indicated that exporters whose export value exceeds US$2 000 (about MK2 million) will be mandated to declare these through an electronic form in line with the Exchange Control Regulations of 2022.

Market analyst Bond Mtembezeka, however, observed that the success of such measures can only go as far as the country has ability to generate forex.

“The forex shortage issue is fundamentally a capacity issue. As a country, we are not doing enough to export more. We can have these measures in place but if there is little to export the forex shortage problem will persist indefinitely,” he said.

Malawi requires US$3 billion per year to meet imports requirement but only produces US$1 billion, according to RBM data.

According to RBM, the foreign exchange the country generates is only enough to cover 33 percent or one third of the import needs.

Each month, Malawi spends an average of US$250 million for imports.