Economists and small and medium enterprises (SMEs)have expressed mixed views on a proposal to “fix” the exchange rate to boost the availability of foreign currency in the formal market.
The proposal comes at a time the country is in the thick of an acute forex shortage and the subsequent arbitrage that follows. Reports show that the US dollar is trading at around K5 000 on the parallel market against the official exchange rate pegged at K1 750/dollar.
Local SMEs say the forex shortage and the spread between the formal and informal exchange rates have negatively affected their business operations.
A Lilongwe-based SME said the shortage of forex in the formal market has forced them to go into informal channels which carry an inherent risk than the formal channels.
“We have resorted to using informal channels because there is no forex in our commercial banks,” she said. “So, if I want to import from China, I can ask someone with a foreign currency denominated account or a person with an account in China to pay for that. We then pay that person the kwacha equivalent using the parallel rate.”
The SME further explained that sometimes the people do not remit the funds, citing network problems and other excuses.
She said: “And that also affects our mark-ups. The government should do something to regulate this sector and stabilise the exchange rate.”
The sentiments coincided with recommendations alleged to be from the business community to fix the exchange rate, presumably at K3 900 against US dollar. Business News could not independently verify the authenticity of the chat.
However, Nyirenda said she would back the proposal if it helps stabilise the forex market.
“If fixing the exchange rate at K3 900 would bring forex into the formal market, which is more secure, then let’s go for it,” she said.
Meanwhile, economic analysts have cautioned that fixing the exchange rate at K3 900 to close the gap with the parallel rate would have dire consequences for the local economy.
Economics Association of Malawi (Ecama) president Bertha Bangara-Chikadza observed that fixing the exchange rate to match the parallel rate would be like “trying to hit a moving target”, noting that the last devaluation failed to stabilise the exchange rate.
In a WhatsApp response, she said. “Therefore, it is indeed illogical and a futile exercise to keep following the parallel market rates, as doing so is chasing a moving target, without any accompanying benefits, but sharp increases in prices/inflation.
“With over 100 percent loss in its value, we believe the kwacha fully aligned to its fundamental level, and that the suggested K3 900 per dollar in the parallel market is speculative, opportunistic and distortionary to prices of goods and services.”
In a separate interview, economic analyst Bond Mtembezeka cautioned that the move may not have the desired effect in the current economic environment.
“The challenge is that in times where liquidity is a challenge, speculation will always be there. The only sustainable way to deal with speculation is to ensure there is a constant flow of liquidity both on the official and parallel markets,” he said.
Since the last devaluation, the country’s total forex reserves have dropped from $568.9 million (or an equivalent of 2.3 months of import cover at the time of the devaluation to $516.9 million (or 2.1 months of import cover) in November 2024, according to RBM figures.
