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Thursday, March 5, 2015

Feeling the pinch in Malawi


Tobacco selling season is almost upon us in Malawi and just like every year, the growers brace themselves for the inevitable strengthening of the Kwacha. It's bad enough that interest on farm input loans runs as high as 40% p.a., but to also have to contend with less Kwacha for every dollar in sales proceeds just doesn't feel fair. 

You see, tobacco inflows are concentrated between April and August of every year resulting in an average Kwacha appreciation of 7 - 10%. What this means is that aside from loan interest, the growers will also have to fork out 7 - 10% more to repay Kwacha loans that were created when the dollar was stronger. 

At this point you are probably thinking " why don't they hedge their exposure?" e.g. why don't they; 

1) borrow in dollars; surely interest rates would also be lower. This is possible but the commercial  banks capacity to lend in forex is very limited due to stringent regulatory requirements.
2) hold on to forex until later in the year and convert when Kwacha is weaker. Makes sense but it's unlikely to happen because the growers always need the cash immediately 
3) enter into fx forwards well in advance when the Kwacha is weakest. Good idea but unfortunately the interest rate differential is so huge that the hedge would be useless.

At a glance things look bleak. Well, the good news is that a fourth option exists which involves forming Savings & Credit Cooperative Unions(Sacco's). Sacco's would be able to address the growers' short term liquidity challenges, provide cheaper credit than banks and also allow growers to speak with one voice to lobby the regulator to ease restrictions on dollar denominated lending. Sacco's are major players in many other African countries and I don't see why Malawi shouldn't borrow a 'leaf' from our neighbors.