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Market Report Fortnight ending 09th May 2003 Report
09/03
Foreign Exchange Reserves
The market is currently experiencing a shortage of
foreign exchange as a result of a sluggish build up
of foreign exchange reserves. Latest numbers indicate
that the economy's foreign exchange position has actually
been deteriorating when the reserves at the close of
April 2003 declined compared to the reserves position
recorded at the close of March 2003. This year's outturn
is in sharp contrast to what transpired during a corresponding
period in 2002 when the country's foreign exchange reserves
position was rising and adequate enough to meet an equivalent
of four months of imports.
This development this year has come as
a surprise because the economy always registers improvements
in its foreign exchange levels during this time of the
year due to tobacco sales.
This outturn to a larger extent reflects unfavorable
circumstances surrounding this year's tobacco marketing.
This year's season has so far been characterized by
low prices and could likely be a replica of the 2002
season which was characterized by cross boarder smuggling
perpetuated by erratic prices on the domestic market.
This development is, however, unfortunate in that it
will inevitably erode the strength of the Kwacha against
its major trading partners. Currently the local currency
has in fact started showing strong signs of depreciating
against the USD. After substantially appreciating to
a market average of MWK90.30 barely three weeks ago,
the kwacha is currently trading at around MWK91.00 to
the USD.
The current scarcity of the USD on the
market is to some extent a reflection of the impact
the lean period had on the level of foreign exchange
reserves and could therefore be short lived. The recovery
process will, however, be slow due to lack of supplementary
sources of foreign exchange following the suspension
of foreign assistance in 2002. This will likely see
the kwacha gradually depreciate against the USD in the
immediate short term but will likely stabilize in the
medium term.
Persistent depreciation of the Kwacha, however, does
not augur well with macroeconomic stability. A weak
kwacha, among other harmful effects, automatically translates
into high and rising fuel prices and is therefore inflationary.
This trend if not reversed, will negate gains the economy
made when the annual inflation rate dropped to 10.2%
in March 2003 from 10.5% in February and 10.7% in January.
Financial Markets and Interest Rates
The market for treasury bills and Reserve Bank of Malawi
bills registered mixed outcomes on yield rates. According
to results of the auction held on 2nd May 2003, the
yield rate for the 273 days treasury bills contracted
substantially to 38.67% from 39.48% registered during
the auction held on 25th April 2003.
On the other hand, the yield rates for the 182 days
and 91 days tenors continued to increase when they registered
38.99% and 37.86% from respective rates of 38.90% and
37.79%.
On the market for Reserve Bank of Malawi
Bills, the average yield rate for the 63 days bill increased
to 37.18% on 29th April 2003 from 36.87% recorded on
22nd April. On the other hand, the yield rate for the
91 days RBM bill stabilized at 37.57%.
Indications on the market are that the
treasury will continue to float government paper to
service maturing debt and the Reserve Bank of Malawi
will continue the issue of the RBM bills with a view
to check unprecedented growth in money supply registered
during the previous months. This will likely see yield
rates for both papers remaining high in the short and
medium term.
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