Policy disconnect undermines economic prospects—report

Conflicting objectives of monetary policy to manage the exchange rate and contain inflation undermine the productivity of the agriculture sector, a report by the Mwapata Institute shows.

The report, titled Prioritising Policies for Driving Inclusive Agricultural Transformation in Malawi and jointly published by the Bureau for Food and Agricultural Policy, Alliance for Green Revolution in Africa and the International Food Policy Research Institute, notes that policy decisions affecting the value of the kwacha mostly work against efforts to lower inflation.

The researchers observe that the kwacha might be overvalued, a development that could constrain exports and “lead to lower reserves and national economic growth”, adding that: “Additional exchange controls on exporters also disincentivise formal sector agricultural exports.”

Reads the report in part: “High prices also filter through to producer prices, weakening the cost competitiveness of all value chains, particularly input-intensive industries.

“Lastly, the exchange rate regime and decisions affecting the value of the kwacha mean that if the currency is overvalued, it adds to the structural weakness of this import-dependent economy in  terms of foreign reserves shortages, promotes rent-seeking and corruption, but makes imports potentially cheaper.”

The observation comes after the Economist Intelligence Unit, a research and analysis division of the Economist Group of the United Kingdom, predicted that Malawi’s foreign-currency shortages could prompt the Reserve Bank of Malawi to devalue the kwacha by the end of July.

The central bank has since resisted calls to devalue the kwacha, but the spread between the formal and informal market exchange rates have widened to close to 50 percent, with the dollar trading at an average of K1 095 in authorised dealer banks and about K1 900 in the black market.

Reacting to the developments, Malawi University of Business and Applied Sciences associate professor of economics Betchani Tchereni said government’s objective is to promote price stability”.

He said: “Government has to raise the policy rate to contain inflation because without such measures, the economy will become more volatile and unpredictable to businesses.”