RBM should not give us chaff

In his 2013/14 national budget speech,  the resignation tone-deaf Finance Minister Ken Lipenga made a cheeky statement  that hit at folks who questioned the sustainability of the kwacha’s strength,  which at the time had started to appreciate after a year of decline.

While Lipenga and his sympathisers said  the strengthening of the kwacha was due to the seasonal tobacco inflows that  started in March as well as cautioned against wild optimism that the kwacha  would continue its bullish charge, the minister chalked down all the warnings  about the unit’s gains being short term to jealousy and pessimistic  syndrome.

Hereunder is the statement that Lipenga  read in the budget speech, which could haunt him as the kwacha recoils against  the more muscular trading partners:”Instead of giving credit to the medicine,  there is now a frantic search for the cause of this healing process. Suddenly,  it seems the cause of this improvement in the patient’s condition has become a  mystery. Questions are being asked: Is it perhaps only because of the season? Is  it perhaps the tobacco, or the maize, or could there have been a massive  depreciation of another currency which has caused the kwacha to gain weight?  Could this be temporary? “…Mr. Speaker, Sir, I urge those engaged in this  fruitless search to search no more. The reasons for the stabilisation of the  kwacha and the availability of fuel are staring us all in the face: the reasons  are the very same economic reforms and measures which this House debated and  wisely approved. The reasons lie in the legislation regarding human rights which  this House passed. The reasons for the emerging recovery have to do with the  restoration of damaged relations with our development partners which this House  applauded last year,” waxed the lyrical Lipenga.

That day, May 24 2013, the kwacha  exchange rate to the dollar was hovering around K328, having pared back losses  after its depreciated high of roughly K415 a month or two before the Minister’s  statement.

Now that pessimists appear to have been  right after all about the seasonal effects on the kwacha and that the currency  is retreating towards the K400 mark again—it is trading around K390 a dollar  this week—the story has changed. The market is ignorant, says the Reserve Bank  of Malawi (RBM).

It is funny that the RBM now blames the  market—which it liberated last May to trade the kwacha as they please—for the  recent wave of depreciations.I wonder what happened to the sound policies that  the Finance Minister was lauding for the local unit’s overflowing testosterone  back in May!

In an e-mail response to The  Nation this week, the central bank seemed to wonder how the kwacha can be  losing value when the import cover is 3.9 months—way above the international  threshold of three months and which is in a much better position than the  country has ever been in at any time over the past few years. The RBM thinks the  market does not have this information.

This is laughable because—to borrow  Lipenga’s language—the RBM should search no more.The reason for the kwacha’s  sudden impotence is staring right into their face. It is one lousy word that has  confused economists since time immemorial: confidence.

Granted, we may be sitting on nearly  $740 million dollars of import cover as RBM says. The question is: Will it be  there between December and February—the so-called lean period?

We all know that after tobacco, donor  aid is the second most important source of forex for Malawi. The market does not  believe that with donor’s public anger at the cash-gate and the administration’s  lack of spine to deal with it, chances of donors disbursing money as religiously  are not so good at a time we have almost sold all of our lucrative leaf when the  kwacha was still strong.

Forex traders are also factoring  political risk into the value of the kwacha, especially considering that this is  an election fiscal calendar where spending is always higher because adhering to  tight fiscal and monetary policy as well as curbing imports to improve the  current account deficit is always a tall order.

Add to that the inflation outlook and  you can understand that it is not just a question of having a lot of dollars in  the financial system at a particular moment in time.Sure, the country’s  inflation has sharply come down from a peak of 38 percent in February 2013 to  around 23.3 percent last month.This improvement notwithstanding, it is obvious  the market does not believe that the general rise in prices can slow down to the  national budget’s 14.2 percent target by December 2013 and to 7.0 percent by  December 2014.

The looming maize crisis does not help  matters either as the staple grain’s price surges unabated with Admarc too broke  to help stabilise prices and government clueless about how to raise money to  fill strategic grain reserves.

With all this, Lipenga’s 2013/14 budget  objective “of a stable exchange rate while maintaining current account  sustainability” sounds far-fetched—and no one in the market obviously buys  it.

Thus, when all the chaff has been peeled  away, everything becomes clear on the grain: the kwacha is suffering from a  deficit of confidence and the cure is nowhere near.