MSB PROJECTS FLUCTUATING EXCHANGE RATE, INFLATION RISE
Daily Times, Monday September 5, 2011

The August Financial and economical report by Malawi Savings Bank says the recent devaluation of the Kwacha will push up inflation and it has projected exchange rate fluctuation to continue this month.

The Kwacha was devalued by 10percent on August 8 and its official average rate against the US dollar increased to k165.8786 from k150.80 which has been the case since February 2010.

The report indicates that as of August 29 the Kwacha’s exchange rate against the dollar averaged K166.2034.

Reserve Bank of Malawi said the devaluation is one of the measures in the ‘package’ government has put in place to stimulate the economy.

“It is expected that the devaluation will in the immediate short term discourage less productive imports, reducing the pressure on foreign exchange in the process.

“In the long term, a weaker Malawi Kwacha is expected to increase the demand for non-traditional exports from Malawi, increasing the supply of foreign exchange in the process,” MSB says.

The bank adds that other factors remaining favourable, a weaker local currency may attract capital in flows into the country from foreign investors.

It says however that in the interim they will be pressure on inflation.

“The national inflation rate is expected to continue rising following the recent devaluation of the Malawi Kwacha. The country’s foreign reserves position is expected to remain reasonably strong mainly attributable to the ongoing tobacco season,” reads the report in part.

The bank notes that the country’s foreign reserves position improved to US$430million or 3.33months of import cover during the week ending August 19 2011.

On the money market, MSB says it remains to be seen which direction Treasury Bills yield rates will take following a sudden increase in the inflation rate and the availability of excess liquidity in the system.

“The recent devaluation of the Kwacha will see a general increase in commodity prices in the economy. This will exert an upward pressure on the national inflation rate in the process. It is therefore expected that the rate for August 2011 will be higher than 7.4percent,” says MSB.

Data from National Statistical Office indicates that year on year headline inflation for the month of July 2011 stands at 7.4 percent, an increase of 0.4 percentage points on the month before.

The bank noted that although food inflation has gone down by 2.4 percent, its impact has not been strong enough to halt the turnaround in headline inflation whose direction has been influenced by upward changes in non-food inflation.

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