Nov. 11 (Bloomberg) -- A shortage of foreign currency in Malawi has forced some companies to delay expansion projects and is beginning to undermine the fixed exchange rate policy that has been in place for more than two years.

The kwacha has weakened 1.4 percent to 142.7 against the dollar from the 140.6 it was set at until Oct. 28. On the black market, the currency is trading at 190. A central bank spokesman said he didn’t think the currency would weaken further.

The problem the central bank is “grappling with now is extent to which they can devalue,” said Thomas Munthali, president of the Economics Association of Malawi. “We are happy that government has realized that a strong kwacha is not good for the economy.”

The shortage of foreign currency means Telekom Networks Malawi, the country’s second largest mobile phone operator, has halted expansion of its network because it was unable to import equipment. Lower investment means the economy will probably miss the government’s target for economic growth of 7.9 percent this year, the central bank said.

The shortage of foreign currency has been caused by falling tobacco prices, a decline in foreign portfolio investment and the global recession, Samuel Malitoni, the central bank’s spokesman and legal counsel. Reserves currently stand at $335.4 million, or just 2.69 months of import cover.

Malitoni said he didn’t expect the kwacha would slip any further.

“As the central bank we do not have the mandate to devalue or even control the kwacha, that is the duty of the government and the position now is that the kwacha should not be devalued because it will cause more harm than good,” he said. No one from the Finance Ministry was available for comment.

Falling Revenue

Malawi has earned 8 percent less from tobacco this year after a drop in prices offset increased production, Malitoni said. At the same time, the global recession has reduced remittances from Malawians living abroad.

The recession also prompted international investors to sell as much as 57 percent of their holdings in the stock market in the second quarter, Malitoni said.

“During the third quarter of 2009, there has been virtually no foreign participation on the treasury bills market,” he added.

To contact the reporter on this story: Frank Jomo in Blantyre at fjomo@bloomberg.net.

Last Updated: November 11, 2009 04:56 EST