Beating volatile exchange rates

Malawi is one of the world’s least developed countries with more than half of its population living below the poverty line and a quarter stuck in extreme poverty.

Efforts to reduce poverty have not produced desirable results partly due to rapid population growth.

The country is a struggling developing economy with a narrow industrial base and weak inter-sectoral linkages.

The economy largely hinges on agriculture, which accounts for a third of the gross domestic product and employs over 80 percent of the country’s workforce.

The impact of globalisation on the fragile economy cannot be ignored.

Recently, the global economy has been hit hard by the Covid-19 pandemic as well as Russia’s war in Ukraine while the China-US trade war that has ramped up resentment against the US dollar as a reserve currency.

Malawi has not been spared from the consequent uncertainties as well as disruptions in the global value chains, trade logistics, tourism downturn and falling foreign direct investments alongside off-budget support.

The decline in the foreign inflows, coupled with declining exports, has left the Malawi kwacha volatile against the US dollar.

Sadly, agri-based exports, especially tobacco, tea, sugar and cotton, are sensitive to fluctuations in exchange rates.

The impact of currency volatility has been lethal.

In 2022, the kwacha lost about 25 percent of its value against the dollar.

Despite this devaluation, the local currency remains overvalued.

This has increased the cost of imports, harming businesses and consumers in the process.

It has also made our exports less competitive globally, eroding our balance of payments and foreign currency reserves.

Government, through the Reserve Bank of Malawi, has implemented several mitigation measures, including using forex to stabilise the kwacha and promoting non-traditional exports to diversify forex sources.

While this is commendable, businesses are struggling to stay afloat due to the risks caused by exchange rate volatility.

This is because it makes it difficult to predict future revenues, expenses and business profitability.

While enterprises consider government regulations that affect their ability to manage exchange rate risk, including foreign exchange controls and other policies, more needs to be done to build business resilience to sail through these tough economic times.

How can businesses stay afloat?

Firstly, businesses should consider using multiple currencies such as the US dollar, South African rand, pounds or the euro to hedge against wavy exchange rates.

Secondly, invest in monitoring and forecasting exchange rate trends and stability of the kwacha.

Thirdly, bigger enterprises need to diversify their operations across different countries to spread the risk.

Lastly, to weather currency fluctuations, businesses need to maintain adequate cash flows, lower debt levels and sufficient liquidity.

These suggested solutions alone cannot save any enterprise that does not adopt robust and flexible change management strategies in all spheres of its dealings to adapt to sudden changes.

This might require agile risk management focusing on an ongoing monitoring, evaluation and revision of the strategies as per the changing market conditions.

Government can also intervene to save businesses from drowning by opening windows for fair forms of international commodity barter opportunities and reducing business tax burden.

Regulators can offset this by removing various subsidies that are no longer serving their purpose, widening the tax base to include a mandatory capped age limit for everyone aged above to pay a set minimal tax.

Instead of churning out beautiful speeches against corruption, government should truly fight corruption, strengthen governance structures and implement austerity measures for government ministries, departments and agencies to live within their means.

Malawi is for all of us to save.