Govt must formalise devaluation

You have to feel sorry for the Reserve Bank of Malawi (RBM). Every day, it is at the receiving end of verbal tirades from some folks, especially top politicians with no clue about monetary policy, but who like to pose as experts on everything, forcing the central bank to run around in circles.

Apparently, the central bank has pulled some rank, sending out a team of investigators to probe commercial banks whose foreign exchange rates are above those the central bank recommends.

“We have sent out an investigation team and once they report, we will see that rules and regulations are followed. It is wrong to sell foreign currency at any other rate other than the set one. We will definitely take action,” RBM spokesperson Ralph Tseka told The Nation this week.

Well, take action they must take, but is it the right kind of action? One has to wonder whether this is the action of a father taking it out on his naughty children to demonstrate some macho after being slapped around by a stronger bully at the local pub—or presidential podium.

You see, when one is diagnosed with malaria and the prescription is Chloroquine; that is the drug one must take. You do not say Chloroquine is too bitter and take Panado instead.

Granted, Panado may leave a nicer after-taste in the mouth in the short-term than Chloroquine, maybe even temporarily ease the headache and help the patient not to shiver as violently as may have been the case, but it does not eliminate plasmodium.

In fact, all Panado has done is to relieve the patient of the fever for a while, but these two symptoms will soon come back, even more aggressively, a few hours after taking the pain-killer.

I am not backing banks at all. I rather relish the idea of an assault on our over-profitable, predatory and rapacious banks that have been raiding households and companies, sweeping their little incomes through exaggerated fees and interest rates on loans, but paying peanuts on deposits.

Also, I do not have a legal mind to conclude whether using forex rates that are above central bank prices is illegal or not, but capitalistic reality tells me that this is a free enterprise economy, with goods and services determined by the laws of supply and demand.

Right now, forex is in short supply while the demand is extraordinarily high, with banks keeping long waiting lists at a time of unprecedented import backlogs. The point is: Banks are not the problem on this forex issue. It is the current administration’s benighted economic policies that are the problem.

Unless the authorities improve the policies, the forex shortage will continue and banks will keep milking everybody because right now, they have more power than RBM. By the way, because they have more power, commercial banks in Malawi have already devalued the kwacha—literally.

Right now, banks are conniving with exporters from whom they are buying the forex at higher rates than those recommended by the central bank. Then they make a killing when selling to importers.

You also just have to look at the forward buying forex contracts. These are agreements banks enter into with companies especially, to sell the firms forex at some point in the future, usually in 30 to 90 days at an extra premium rate.

Guess what? This extra premium rate now stands at K30 more than the current official exchange rate of K167, and higher than the K172 or so being displayed in banking halls.

Not long ago, this special premium was only K15 above the official rate. By the end of the day, companies, desperate for forex, are in fact buying the dollar at about K200.

It is this premium bank exchange rate that is factored into companies’ pricing decisions, not the one commercial banks display on their boards. This is why prices of goods and services have continued to rise even after keeping the kwacha officially intact at K167 since the August 2011 devaluation.

This is also why it is hard to understand the timidity to let the kwacha fall to K200 per dollar. That will meet the IMF benchmarks.

Government should stop using the poor as an excuse for inaction because they are already paying more and there is no point in deluding and giving them a phony sense of security when in real terms, the kwacha has already been devalued and the poor are already feeling the effects.

Given the above scenario, in which the formal financial system has already softened the currency, why can’t government just formalise the damn devaluation and get back on the IMF-supported Extended Credit Facility (ECF) programme, which will open aid taps and make forex available?

To the donors, it is also in their interest to see the Malawi economy stabilise. Therefore, once the kwacha is devalued to targeted levels, the IMF must move quickly to restore the programme and other donors should promptly follow.

Government should then move up the dates for opening the tobacco marketing season to end February instead of March so that donor resources plus tobacco proceeds should prop up the country’s foreign currency position; arrest the speculative attacks and ease pressure on the currency market.