Kwacha devaluation sends shock waves

The 44 percent devaluation of the kwacha the Reserve Bank of Malawi (RBM) implemented yesterday has sent shock waves to the economy, with consumers and small-scale businesses saying the move will bring dire consequences to the people, particularly the poor.

But the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) has defended the move, saying that while it could be tough it will encourage more formal trading rather than informal trading which has starved the formal market of foreign exchange, leading to recurring shortages of key supplies such fuel, fertiliser and medical drugs.

In a statement on Wednesday night, RBM Governor Wilson Banda said the 44 percent devaluation follows the imbalances as well as the mismatch in the exchange rate in cash and telegraphic transfer market.

But speaking in an interview yesterday, Financial Market Dealers Association of Malawi (Fimda) president Leslie Fatch said while devaluation goes a long way towards the realignment of the currency, they feel the exchange rate management system needs to ensure forex pricing is flexible to allow the rate to respond to market forces.

He said: “The risk we run is continuing to peg the currency which will create another rift with the parallel market rate if the exchange rate is not responsive as the rate will not be able to find its effective equilibrium where necessary.

“We hope for a responsive exchange rate which will shift the conversation from devaluation to depreciation and appreciation based on market forces.”

Former RBM governor Dalitso Kabambe said in an interview yesterday that devaluing the kwacha by this margin without addressing the root causes of the foreign exchange challenges can not yield intended results.

He said to address the prevailing macroeconomic challenges, government needed to adjust fiscal policy appropriately, tighten monetary policy in line with fundamentals and adopt a more effective exchange rate policy.

Said Kabambe: “If we are interested in correcting the economic problems in this country, we need to correct all the three economic cancers appropriately; the fiscal, monetary and exchange rate policy cancers, then we will begin to heal our economy.”

Chamber for Small and Medium Enterprises Association executive secretary James Chiutsi said the devaluation will make it even harder for small businesses to survive in an environment where they have been thriving with high cost of borrowing and reduced demand.

“This certainly is tough for small-scale business, especially considering that we are largely an importing economy. Those in exporting businesses, who are not many anyway, may see a rise in profits,” he said.

Consumers Association of Malwi executive director John Kapito said the devaluation will worsen product prices, hitting the poor more.

But MCCCI president Lekani Katandula said the exchange rate realignment will help the country to unlock $174 million under the International Monetary Fund (IMF) three-year Extended Credit Facility programme next week and inject some forex liquidity into the formal market.

He said: “More expensive supplies of the key products above is better than no supplies at all.

“We do, however, need to have government look at how they mitigate the impact of the devaluation on the most needy. Revisiting the minimum wage levels and some social cash transfer programmes would be a great start.”

IMF resident representative Nelnan Koumtingue said yesterday the devaluation will help reduce external vulnerabilities and restore macroeconomic stability.

“The RBM is taking these steps to durably rebuild its official international reserves and facilitate a market-determined exchange rate,” he said.

In a statement on Wednesday night, the governor said following the devaluation, the kwacha is now selling at K1 700 against the dollar in authorised dealer banks from K1 180.

The kwacha was also devalued by 25 percent in May 2022 and since January this year, the local unit has depreciated by 13.1 percent through forex auctions, losing about 82.1 percent.

The devaluation comes a week before IMF executive board meets in Washington, USA to decide on Malawi fate on ECF.