The Reserve Bank of Malawi (RBM) should abandon demand side management polices instead of supply side polices if the kwacha’s steep depreciation is to be contained, University of Malawi’s Chancellor College economics professor Ben Kaluwa has said.
Kaluwa, reacting to RBM’s statement released last Friday signed by Governor Charles Chuka which explained the genesis of kwacha fall and measures to tame it, said in an interview on Wednesday the central bank has for a long time missed the point in curbing the local unit’s fall.
“It would be very interesting to see the kind of instruments the central bank would now use to tame the kwacha depreciation,” he said.
Kaluwa said it would be important for RBM to be aware that the country is facing structural problems due to overdependence on rain-fed agriculture, which has been heavily affected by climate change and high prices of farm inputs.
In the statement, RBM said the kwacha should have stabilised as the central bank has, among other interventions, strengthened its instruments of monetary policy and expects to tighten monetary conditions without raising interest rates further.
RBM said the kwacha exchange rate has over-depreciated given the current level of foreign exchange reserves, which have been above three months of import cover.
But Kaluwa queried: “Why have they not been using those instruments before? Why were they relying heavily on the bank rate?
He noted that tackling supply side constraints by reducing cost of borrowing, among others, could lead to an increase in agricultural and industrial production which he said would culminate into the expansion of Malawi’s export base.
“If that is done, we will not worry about inflation and depreciation,” he said, adding that expanding production base would result into more production firms paying more taxes while contributing to the generation of foreign exchange, thereby moderating inflation.
The kwacha has depreciated by 338 percent from K169 against the dollar when it was devalued by about 49 percent in May 2012 and subsequently floated to be determined by market forces of demand and supply.
As of yesterday, the kwacha was trading at around K735 to a dollar in most authorised dealer banks, but has depreciated further in foreign exchange bureaus.
The RBM statement said the integration of the economy into the regional and global markets is also impacting the kwacha negatively.
The central bank has pleaded with Malawians to persevere in the current situation while supporting the government’s prudent fiscal policies going forward.