The Reserve Bank of Malawi (RBM) has assured the general public of stabilization of the currency Kwacha which has slipped against its major foreign currencies including the American Dollar, South African Rand, The Botswana Pula and the British Sterling among others leading to escalating prices of goods and services.
But economic experts have attributed the further slippage of the Kwacha to the authorities’ failure attracting investors in the import substitution area which is costing Malawi heavily after the nation adapted the free-floating exchange rate. Since May 2012, upon devaluation, the Kwacha has lost value by 338 percent from MK169 against US Dollar as currently the local currency is trading at around MK720 against US Dollar.
In a press statement released over the weekend signed by RBM Governor Charles Chuka which is also available to The Maravi Post, the central bank is optimistic of getting the Kwacha back despite its continue slippage against international foreign exchange.
“The statement has been necessitated by the sharp and longer than anticipated depreciation of the Kwacha since July, 2015. The Kwacha was devalued in May 2012 by 49% to K250/US$ and thereafter allowed to be determined by market forces of demand and supply. The main objective was to correct once and for all the exchange rate misalignment and create long-term conditions for a more resilient, productive and exporting country
“Malawians would recall, the exchange rate misalignment was so serious that the country had very limited foreign exchange reserves and accumulated huge external payments arrears (estimated to be in excess of US$600 million) held by both Government and the private sector.
This created persistent and wide spread shortages of fuel and other critical imports. Indeed, the exchange rate misalignment diverted foreign exchange transactions to the parallel or black market. Prior to the devaluation the official exchange rate was K169/US$ compared to over K250/US$ in the parallel market.
“To support them is alignment; exchange controls were intensified and pervasive. With non-bank foreign exchange bureau closed, access to foreign exchange by the general public was extremely difficult. To cut along story short, the economy was in a precarious state and had the exchange rate misalignment continued, the government would have lost the Kwacha as legal tender currency and the country could have become completely dollarized”, reads in part the statement.
The central bank says by June 2013, the end of the 2012/2013 fiscal year, the Kwacha had lost a further 32% to K330/US$. The central bank’s net foreign exchange position had improved from negative US$161.1million in June 2012 to US$147.5 million, implying an increase in terms of months of import cover from 0.6 to 2.4 that all external payments arrears had been cleared by September 2013. This improvement in the country’s external position was made possible not just by the liberalization of the foreign exchange market but also by the fact that government did not borrow from the domestic market that financial year.
RBM reminded the general public that cash gate came to light in September 2013 and donor direct budget support gradually dissipated thereafter but the liberalized exchange rates system and tight monetary policies, the country forged ahead and the Reserve Bank’s net foreign exchange position reached US$158 million by end-June 2014.
“In addition to withdrawal of aid, the fiscal year 2014/2015 saw another calamity as the country experienced drought and floods in many parts of the country. As a result, government’s intention to sustain fiscal prudence became unattainable and recourse to domestic resources increased by another K95billion. Again, the fiscal imbalance increased pressure on the Kwacha which fell further by 10% to K437/US$ by the end of that fiscal year. However, the central bank’s net foreign exchange position remained healthy at US$474 billion or an equivalent of 3.4 months of imports.
“Intent on stabilizing the economy and improving the welfare of Malawians, Government tried to restore fiscal prudence during 2015/2016 but hopes for a better year did not materialize as the debilitating impact of the drought experienced during the 2014/2015 growing season came to light after the budget had been passed. Data collected by the Reserve Bank shows that the drought reduced the country’s export receipts through the banking system by about US$300
million to US$700 million.
“In the meantime, suspension of direct budget support continued. And with rumors that tobacco auctions would generate less foreign exchange compared to the previous year, the private sector panicked and demand for foreign exchange shot up in July 2015. The situation got fueled with the news that Government domestic borrowing exceeded its target in June resulting in the IMF-supported economic reform program getting off-track. In the circumstances, therefore, the Kwacha depreciated precipitously from K437/US$ in June 2015 to K581/US$ in November 2015”, noted Governor Chuka.
The central bank defended the current status of the Kwacha as it was marching with international value for the first times saying other countries went through the same trend citing Ghana liberalized in 1983 and the Cedi fell by 990%; Uganda shilling was floated in1987and it lost a whopping 1078%; the Tanzanians hilling was floated in1987 and depreciated by407%; and in1989 the Zambian Kwacha was let loose and it depreciated by 327%.
“Today, we marvel the economic conditions in these countries. Until the recent turmoil in global markets, these countries experienced stable macroeconomic conditions, low and relatively stable inflation and low interest rates. When viewed from this perspective and when the devastation of cash gate and unfavorable weather conditions are taken into consideration, it is only fair to conclude that the Kwacha has fared reasonably well. More importantly, Malawi can join these countries and achieve the SADC target of 3-7% inflation only if we persevere in the current situation while supporting the government’s efforts to implement prudent fiscal policies going forward.
“Despite likely negative impacts of the El Niño weather pattern, the outlook is that the Kwacha exchange rate will stabilize sooner than later. First, the Reserve Bank of Malawi believes the Kwacha exchange rate has over-depreciated given the current level of foreign exchange reserves. Second, and as alluded to earlier, government fiscal operations have been significantly curtailed and domestic borrowing is now being contained in line with the IMF-supported economic program.
Third, the central bank has strengthened its instruments of monetary policy and expects to tighten monetary conditions without raising interest rates further.
“Kwacha depreciation is hurting low-income earners and is creating undue uncertainty in the business community. It is however misleading to portray a collapse of the economy. Despite the debilitating exogenous shocks, the Kwacha has performed relatively better than in other countries when they also floated their currencies in the 1980’s and 1990’s. Malawi continues to pay for its international obligations and foreign exchange reserves have never been better, especially taking in to account the loss of donor direct budget support. Fiscal and monetary policy coordination has been strong despite daunting fiscal pressures”, concludes the central bank statement.
