Malawi needs an exchange rate regime that is supported by prudent fiscal policy as the current situation leaves the exchange rate exposed and vulnerable to external shocks, economists have said.
The experts were responding to University of Malawi economics professor Winford Masanjala’s presentation titled ‘Framework for internal and external stabilisation’ made at the Economics Association of Malawi Annual Lakeshore Conference in Mangochi which ended on Friday.
In his presentation, he said Treasury’s huge appetite for domestic borrowing and spending has a bearing on the exchange rate volatility.
The presentation by Masanjala, a former Ministry of Economic Planning and Development principal secretary, zeroed in on the Currency Board Arrangement (CBA) exchange rate system, which some suggested could help to stabilise the country’s exchange rate and the economy, highlighting its merits and demerits.
His analysis came against the background that the official exchange rate continues to chase the parallel market exchange rate despite the 25 percent kwacha devaluation in May 2022 and a subsequent one by 44 percent in November 2023, a situation he said underlines deep economic problems.
Said Masanjala: “When I was Secretary to for Economic Planning and Development, someone suggested to my minister that the CBA would be better for Malawi to ensure exchange rate and economic stability.”
He said the benefits of this exchange rate regime are that it limits government from borrowing from the central bank, thereby achieving stability and low domestic debt.
Masanjala, however, said the country’s foreign exchange scarcity means it cannot adopt the policy because it relies on forex availability to back the currency in circulation.
In his response, Illovo Sugar (Malawi) plc managing director Lekani Katandula said the CBA on its own is not the answer to the country’s monetary policy issues.
“I think the CBA, just like the fixed exchange rate or a floating exchange rate regime, would all work but none of them is going to work in isolation,” he said.
On his part, economist Elias Ngalande, who is former Reserve Bank of Malawi governor, said there is need to ensure that the fiscal policy remains within the level where it can support the exchange rate, otherwise the situation would not change no matter what exchange rate regime is employed.
“If we think of starting to use the United States dollar, we should remember that Zimbabwe adopted that earlier, but while things were initially working, it got out of hand,” he said.
A CBA is a monetary system where a country’s domestic currency is backed or pegged to a foreign currency.
Ecama’s annual conference was held under the theme ‘Economic priorities for vulnerable economy’.
