Mixed views on flexible exchange rate regime
There are mixed reactions to the Reserve Bank of Malawi’s (RBM) stance to stick to a flexible exchange rate regime.
A flexible exchange rate regime allows the currency to freely move in the foreign exchange markets depending on market forces of demand and supply.
The analysts have expressed the views in reaction to a statement issued by RBM in the context of the recent macro-economic environment developments, including the 25 percent devaluation of the kwacha effected on May 27.
at a desired market level
RBM indicated that a flexible exchange rate is working for Malawi as the local unit has positively responded to market fundamentals.
Speaking in an interview yesterday, University of Malawi senior economics lecturer Exley Silumbu said the current exchange rate regime has given a lot of task to the exchange rate as supply for foreign exchange in the market is increasingly becoming difficult.
He said: “We are currently facing supply and demand imbalances in the forex market as we are not even meeting the minimum requirement of imports.
“The supply of forex has not been smooth in the face of rising astronomical demand for foreign exchange.”
Silumbu said what the country needs is to solve the structural basis of the economy for a smooth flexible exchange rate regime to work.
“We need to make our economy more flexible to earn more foreign exchange. This will entail finding a continuous flow of forex not just a seasonal flow of forex as is the case now,” he said.
Market analyst Bond Mtembezeka observed that while the idea behind a flexible exchange rate regime is that the market should be self-clearing, the policy does more harm than good to economies such as Malawi.
He said: “ For a currency that is depreciating due to persistent supply side challenges relative to demand like is the case for Malawi, this policy could not be ideal.”
But Financial Market Dealers Association of Malawi vice-president Jim Kalua backs the flexible foreign exchange regime, saying for now it is ideal as opposed to a fixed exchange rate.
“While we appreciate that the current regime is spelling pain, should the policies set by the government materialise, surely we will see some improvements on our currency in relation to others,” he said.
In the statement, RBM Governor Wilson Banda indicated that the exchange rate is currently at a desired market level achieved after the devaluation of kwacha, which has also improved flow of foreign exchange.
“The RBM will therefore continue to allow the exchange rate to respond to market fundamentals by maintaining a flexible exchange rate regime,” he said.
