Devaluation vs. floatation
Earlier this month, the Reserve Bank of Malawi (RBM) effected a double policy decision which affected our beloved kwacha in relation to other major trading currencies such as the dollar, British pound and South African rand.
RBM announced the devaluation of the kwacha and floatation of the same.
Since the announcement, the two terms have tended to be used interchangeably in various quarters. However, in practice, the two terms are miles apart.
For example, by way of definition devaluation refers to the lowering of the value of a country’s currency relative to other currencies. Briefly, devaluation makes a country’s exports relatively less expensive while making imported products relatively more expensive for domestic consumers.
Put loosely, devaluation is a form of control in terms of the value of a currency as determined or dictated by authorities. This is why in our case the RBM announced that the middle rate of the kwacha against the dollar is now at K250 from K168.
On the other hand, floatation is basically a liberalisation policy where a national currency is allowed to freely change its value in reaction to market forces of demand and supply. Simply put, floatation does not in any way limit the range of the rate of a currency. Perhaps, this is why in its announcement of the 49 percent devaluation, RBM did not prescribe a band within which the kwacha should freely float.
In foreign exchange rates being published in newspapers, for example, one can easily notice the difference in values of the kwacha against the dollar with one bank selling the dollar at K285 whereas another one pegs it at K275 and yet another bank at K273.
The market is determining the prices!
Devaluation and floatation could, in a way, be cousins, but they are not one and the same thing although the decision to jointly implement the two is expected to contribute to government’s efforts to reach early agreement with the International Monetary Fund (IMF) to unlock donor flows in the next few months.
Sanity on the market holds the key towards getting the “real value” of the kwacha.
