By Maravipost Reporter
Former Finance Minister Joseph Mwanavekha has said the introduction of the Foreign Exchange Auctions by the Reserve Bank of Malawi (RBM) will lead to massive devaluation or loss of the Malawi Kwacha.
Mwanavekha’s observation follows RBM’s announcement that it has introduced periodic foreign exchange auctions in order to discover, determine and maintain market cleaning price for the local currency with effect from 13 January 2023.
The central bank claims that in these auctions, Authorised Dealer Banks (ADB) will be submitting bids to sell foreign exchange to the RBM at prices freely determined by each participating ADBs.
“The bids shall be for a minimum of USD50,000 and in multiples of USD10,000 thereafter.
“These auctions will facilitate the discovery of a prevailing market clearing exchange rate for the Malawi Kwacha against major currencies and thereby promote transparency in the determination of the exchange rate,” a statement, signed by RBM Governor Wilson Banda, reads in part.
But Mwanavekha, who also served as Chief Executive Officer of the deposed Malawi Savings Bank (MSB) before joining politics, said the move is wrong as it will escalate poverty and suffering of Malawians.
The Chiradzulu law maker and former Democratic Progressive Party (DPP) shadow of Minister Finance in Parliament argued that this policy regime was pursued by the Reserve Bank of Malawi in the early ’90s up to 1995, during the Structural Adjustment Programmes (SAPs).
He said he was at the RBM at that time and was working in the Financial Market Operations Department and was part of the team managing this policy regime, but “it failed miserably and was later abandoned.”
Mwanavekha recounted that at that time, the auctions system of foreign exchange was meant to improve the country’s export competitiveness, provide efficient foreign exchange allocation to banks, maintain price stability, dampen speculative attacks on the Malawi Kwacha and restore investor and donor confidence.
He claimed that all these objectives were never achieved.
“In fact, the opposite was achieved. After introducing this system in January 1994, the Malawi Kwacha devalued by over 300 percent by the end of February 1994. Inflation and interest rates increased to unmanageable levels and people’s disposable incomes declined heavily thereby making Malawians poorer than they were before,” stated Mwanavekha.
He therefore said he was dismayed that RBM is reverting to the failed foreign exchange policy regime.
“There are many studies that were done by the Reserve Bank of Malawi and one of them was entitled “ The efficacy of foreign exchange intervention in Malawi.” This can be accessed on the internet.
“The studies clearly demonstrated that auction system as a foreign exchange policy can’t work in Malawi. The same has not worked in all developing countries including those in Africa,” Mwanavekha argues.
He, therefore warned that if RBM maintains to pursue this foreign exchange policy regime again, Malawians should expect massive and unprecedented devaluation or loss of value of the Malawi Kwacha, unprecedented increase in inflation and interest rates which in turn will lead to unprecedented increase in commodity prices, loss of value of peoples’ salaries and wages, massive poverty and suffering of Malawians.
There was no immediate comment from the central bank.
