Ministry of Finance and Economic Affairs has moved to address foreign exchange liquidity challenges by introducing new guidelines to track export proceeds and guide operation of foreign currency-denominated accounts (FCDAs).

The publication of regulations in the Malawi Government Gazette notice 14 under the Exchange Control Act by Minister of Finance and Economic Affairs Sosten Gwengwe comes against a background of existing guidelines that require exporters to sell 30 percent of their export proceeds to the Reserve Bank of Malawi (RBM) through authorised dealer banks (ADBs).

Reads the notice dated May 27 2022: “The objective of the regulations is to guide operations of FCDAs, increase the circulation of scarce foreign currency resources in the Malawi economy and ensure timely repatriation of all export proceeds to Malawi.”

Under the new regulations, a person who receives export proceeds or foreign currency shall, within two working days after receipt, be mandated to sell 30 percent to RBM through ADBs.

Signed the guidelines:
Gwengwe

RBM Governor Wilson Banda is on record saying the move is temporary and hopes to return to 100 percent export proceeds retention in the near future once the country builds robust export capacity.

Reacting to the new guidelines, Financial Market Dealers Association of Malawi (Fimda) president Mclewen Sikwese said in an interview yesterday the move may not impact on the level of liquidity available, but will only ensure forex liquidity is passed from exporters to the RBM quicker.

Speaking separately, economic statistician Alick Nyasulu said the move does not address the core issues affecting the supply of foreign exchange.

He said: “Forcing exporters to sell 30 percent of export proceeds is a temporary solution and we are likely to go around in circles.

“In fact, it will motivate exporters, especially big exporters to do trade invoicing whereby exporters under-declare the value of exports and send part of their export earnings in other countries where they can hold accounts.”

Market analyst Bond Mtembezeka, in an interview yesterday, argued that the sure way out of the foreign exchange liquidity challenges is to export more and also lobby the diaspora and provide incentives for them to remit their income back home.

RBM first introduced an export incentive scheme in 1994 to allow exporters to retain export proceeds in their FCDAs, which started with a retention or conversion ratio of 10/90 and has progressively been adjusted downwards until it was abolished in March 2015.

Since the abolishment of the retention ratio, exporters were allowed to retain 100 percent of export proceeds in their FCDA.

But lately, foreign exchange reserves have been under pressure as the country’s demand for imports has been rising.

The depletion of the reserves has since put the kwacha under pressure. The local unit depreciated by K4.16 against the dollar in the first quarter of this year as demand for foreign exchange continued to surpass its supply.

On the other hand, the official forex reserves under the direct control of the RBM were recorded at $363.27 million, which is an equivalent of 1.45 months of import cover in April from $392.01 million, an equivalent of 1.88 months of import cover during the same period last year.

Last Friday, RBM devalued the kwacha by 25 percent in a move the central bank said was meant to eliminate double digit misalignments between the official telegraphic transfer (TT) exchange rate and the cash rate in ADBs.

The decision, hoped the RBM, would also help narrow the supply-demand imbalances in the forex market.

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