Kwacha Depreciation To Continue—EIU

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The Economist Intelligence Unit (EIU) says the kwacha will depreciate further against the dollar to trade at K1 048.50 by year end.

In its forecast for Malawi contained in the latest Nico Asset Managers Report, the EIU said the kwacha is expected to continue depreciating as exports continue to underperform coupled with lack of monetary stability and high inflation.

Reads the report in part: “The currency will remain overvalued going by the real effective exchange rate with the transition to a market-led exchange rate in 2024 which is likely to induce volatility.

“Furthermore, the lack of monetary stability and high inflation in Malawi relative to its trading partners will cause the kwacha to continue to depreciate against the dollar from 2024.”

The kwacha, which is currently officially trading at K1 036 to the dollar, was devalued by 25 percent on May 27 this year, a move the Reserve Bank of Malawi (RBM)said was necessary to align the foreign exchange supply to the macroeconomic fundamentals as well as ensure supply of foreign exchange in the formal market.

Meanwhile, gross official reserves under the direct control of the RBM dropped to $338.87 million, an equivalent of 1.36 months of import cover at the end of November 2022 from $389.26 million, an equivalent of 1.56 months of import cover in August 2021, according to RBM Financial Markets Development Report.

In an interview, market analyst Bond Mtembezeka observed that if nothing radical is done, the kwacha’s continued fall will be inevitable, a situation which will have an impact on inflation and general economic growth.

“Considering that Malawi predominantly imports its raw materials for production and manufacturing, a depreciated exchange rate makes these raw materials expensive and, therefore, producers don’t import as much and production declines which affects economic output and growth,” he said.

RBM Governor Wilson Banda recently said “the central bank is doing all it can to balance forex supply and demand

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