World Bank tips govt on taming kwacha fall

Reducing the size of fiscal deficit and maintaining a tight monetary policy until inflation is brought down are critical to taming the continued weakening of the kwacha against other foreign currencies, World Bank country manager Laura Kullenberg has said.

Going forward, she said Malawi needs to improve its competitiveness on the global market so that the country generates additional sources of export earnings to help beef up supply of foreign exchange.

Kullenberg said this in an interview in Lilongwe last week when asked to comment on the recent drastic depreciation of the local currency, more especially against the dollar.

“The most important need is for government to reduce the size of its fiscal deficit and to maintain a tight monetary policy until inflation can be brought down to a lower level,” she said.

Kullenberg said Malawi naturally has a seasonal pattern of supply and demand for foreign exchange which has an effect on the movement of the exchange rate either way.

Traditionally, the largest sector that brings in more foreign exchange is still tobacco, with earnings coming in during the auction sales season between March and September.

She said: “In the short-term, the basic macroeconomic imbalances that have caused so much difficulty in Malawi such as fiscal deficits and inflation need to be addressed.

“In addition, it is important not to lose faith in the flexible exchange rate regime. It is important to look beyond the exchange rate to the underlying issues that are causing the kwacha to depreciate.”

Kullenberg noted a few years ago, government tried to fix the exchange rate but the damage to the economy was disastrous.

Reacting to the World Bank observations, Ministry of Finance, Economic Planning and Development spokesperson Nations Msowoya, while noting that government is already diversifying the export base, said authorities are also implementing both tight monetary and fiscal policies.

“If we were exporting a lot or if our tourism was well developed, the loss in the value of the kwacha should have been in our favour, therefore, Kullenberg’s point is valid,” he said.

The kwacha has shed about 30 percent of its value for the past two months largely to speculative tendencies by foreign exchange dealers.