Forex reforms not fully implemented

The World Bank has attributed the current scarcity of foreign exchange to failure by monetary authorities to complete exchange rate reforms announced in November 2023.

Following the 44 percent kwacha devaluation by the Reserve Bank of Malawi (RBM) in November last year, which was a key reform in foreign exchange management, the spread between the official and bureau exchange rates dropped from 60 percent to 10 percent, resulting in forex availability, according to the World Bank.

But in its latest Malawi Economic Monitor, the Bretton Woods institution observes that while high inflation, in excess of 30 percent, coupled with a stable official exchange rate, has made it challenging to increase the supply of foreign exchange, banks, exporters and investors are reluctant to convert their foreign exchange holdings into kwacha.

The bank says this is because of the uncertainty surrounding access to forex when needed as well as higher rates offered in informal parallel markets, which has limited foreign exchange liquidity among Malawian banks.

This has made foreign exchange sales to authorised dealer banks (ADBs) by the RBM unable to satisfy demand, according to the bank.

Reads the report in part: “The RBM has kept the official exchange rate stable since the November 2023 devaluation and some key liberalisation measures have yet to be fully implemented.

“Rather than setting rates freely, ADBs continue to transact exclusively at the official exchange rate in the spot market.”

The bank further says while foreign exchange auctions are held twice in a month, volumes remain low and have, so far, resulted in only three percent adjustment of the exchange rate in February 2024. The kwacha is officially trading at K1 751 against the dollar

The bank further says bureau exchange rate has become a less useful guide for assessing the market-clearing rate as the spread between the official and parallel market rates is higher than reported bureau rates.

Speaking in an interview yesterday, economic consultant and researcher Exley Silumbu said while RBM does not have enough forex to manage a full-fledged forex regime, the only sure way of bringing forex to the formal market is by letting the kwacha to freely float and be dictated by market forces of demand and supply.

He said: “Devaluation just makes matters worse as it does not generate forex. The solution is in the promotion of export drive, especially manufacturing of goods to take advantage of the regional markets.

“Forex is in private hands, so for the central bank to attract forex into the formal market, they have to let the kwacha lose value on its own.”

Silumbu, a former University of Malawi economics lecturer said some of the conditions dictated by the Bretton Woods institutions are not realistic as the central bank does not generate foreign exchange.

Former RBM governor Dalitso Kabambe, in an e-mail response yesterday, said Malawi is in a precarious economic situation with official exchange rate pegged at K1 751 to the dollar while the parallel market rate has jumped to K2 500.

“This stark disparity indicates a serious misalignment in the currency valuation, revealing the ineffectiveness of existing monetary policies,” he said.

Kabambe said the kwacha devaluation was a result of failure by monetary authorities to adopt sound fiscal, monetary and exchange rate policies.

“The continued inaction and lack of comprehensive reforms have led us to a point where further devaluation appears

 inevitable. The underlying policies have not only failed to stabilise the economy, but they have also diminished the public’s trust in both the currency and the governing bodies responsible for its stewardship,” he said.

Economic statistician Alick Nyasulu suggested that Malawi should start looking beyond the International Monetary Fund (IMF) approach and invest more into exporting more high-value goods that can generate more foreign exchange to manage the country’s currency and economy.

He said: “Devaluation has never helped our economy and I doubt it will do so in the near future. It is only a short-term tool that allows us to borrow, but once that borrowing cycle is over, we are always requested to devalue.”

Economics Association of Malawi president Bertha Bangara said devaluation may be theoretically necessary if the official exchange rate remains overvalued compared to the parallel market, but such a policy action does not bear the required fruits and should be approached cautiously.

“In addition to measures that the monetary authorities can pursue, structural reforms to enhance export competitiveness and diversify the economy are crucial for advancing competitiveness of our exports and improving the balance of payments,” she said.

In reaction, RBM spokesperson Mark Lungu yesteday said apart from forex auctions, which is one of the reforms agreed to determine the correct exchange on the market, the central bank has been implementing a number of initiatives, including the intensity in export proceeds reconciliation.

He said: “It is not entirely correct that RBM has not implemented the reforms as we continue to conduct forex auctions.

“RBM’s role is to manage foreign exchange reserves and not generate. This is for other relevant stakeholders and the private sector.”

When approving the four-year $175 million Extended Credit Facility in November 2023, IMF said it will be critical for Malawi to facilitate a market-clearing exchange rate on an ongoing basis as monetary authorities seek to ease foreign exchange scarcity