The Holy Grail: Yearning for stable kwacha
President Joyce Banda described 2013 as a year of breakthroughs. Apparently after observing the kwacha stabilise temporarily between June and August, tobacco farmers smiling home with dollars, the President thought Malawi was finally out of the woods.
But, today experts can hardly imagine what lies ahead while authorities still assure Malawians with some caution.
Wishing for a better kwacha
Things are not well for the kwacha, at least according to official figures. The local currency has todate nose-dived by about 30 percent against the dollar since June, worse than last year, after its 49 percent devaluation and floatation.
But the Reserve Bank of Malawi (RBM) has since the adoption of the floated exchange rate assured Malawians that the situation is normal, is under control or at least it has the energy and resources to arrest the troubling fall.
Last year, RBM governor, Charles Chuka, after the adoption of the new exchange rate regime, argued that the kwacha would not depreciate over K400 against the dollar. He argued that at the exchange rate of K400 nobody would buy the green buck. Unfortunately the kwacha dived by over 150 percent between May and March on the market to hit K420 to the dollar.
And the official exchange rate—the rate at which the central bank trades forex and consequently influences the market rate—fell by about 135 percent since April 2012, just before the regime change, to bottom at an average K392.44—a few notches below the governor’s target—in March 2012.
And in August this year, assuring Malawians of better times, Chuka was quoted having said that he will ensure that the economy does not go back to the kind of kwacha fluctuations that the country saw last year.
In September, Chuka was also quoted having said that he has sufficient foreign exchange reserves and has a target of two months import cover which is about $366 million (K128 billion) by end of this year pointing out that he has enough muscle to make sure that no one tries him with the kwacha.
He promised he would ensure that the kwacha stabilises throughout this period [lean period] all the way to next year so that fuel prices do not keep on rising too much.
But based on the central bank’s statistics Malawi is yet to experience a stable exchange rate.
To date, as shown by RBM official exchange rate figures, the unit has shed off about 30 percent against the dollar, 35 percent against the euro, 38 percent against the pound sterling and by 25 percent against the rand since its celebrated appreciation in June.
Full monetary dose, loaded reserves
The central bank and proponents of a floating exchange rate argue that when the kwacha is determined by market forces the foreign exchange is available. But what happens to its exchange rate? What happens to inflation and interest rates?
Early this year, Nico Asset managers warned that the depreciation of the local unit would fuel inflation and consequently erode consumers’ purchasing power.
Since the kwacha was floated the central bank has been implementing a tight monetary policy that has seen the RBM raised its base lending rate—a monetary policy instrument that consequently determines interest rates—to 25 percent in December. The RBM has maintained the bank rate at that rate to date. As a result lending rates shot to about 40 percent.
The latest MPC minutes indicate that the committee resolved to maintain the high base lending rate to sustain the tight monetary policy stance against a backdrop of emerging risks to inflation.
Due to the falling kwacha, the Malawi Energy Regulatory Authority (Mera) raised the fuel pump prices.
But official reports provided by the RBM indicate that private sector forex reserves have been rising.
Official gross gross reserves have also been considerably above two months import cover since the closure of the tobacco marketing season and the onset of the lean period.
But the same official RBM figures indicate the kwacha has been plummeting against the dollar and other major trading currencies on a daily basis, while the RBM, the current foreign exchange rate regime is not free floating but rather managed.
The bank says now and again it intervenes on the market to influence the exchange rate through tight monetary policy by controlling money supply and through forex transactions.
Looking back for lessons
The May 2012 kwacha flotation was not the first in Malawi. According to a research paper by RBM manager Kisu Simwaka which was accepted in 2011, the exchange rate was also floated in February 1994 and since then the RBM has periodically intervened in the foreign exchange market.
He notes that after the 1994 floatation, the Malawi kwacha depreciated against the dollar from around K4.5 in February 1994 to over K17 in September 1994.
Simwaka, adds that management of the exchange rate in Malawi has been pursued with three major policy objectives which include maintenance of a sustainable balance of payment positions, attainment of stable domestic prices and attainment of growth in real income.
“Overall, the RBM has to do a lot of balancing in managing the exchange rate to ensure that the achievement of a stable exchange rate, which is good for the farmer, does not come at the expense of inflation and the depletion of foreign exchange reserves,” said Simwaka.
He adds that the main objective of attaining low inflation rates was achieved towards the end of 1997 but at the expense of huge foreign exchange reserves and high interest rates, which were used to support the exchange rate.
He further notes that the free floating exchange rate saw Authorised Dealer Banks taking a more active role in determining the path for the kwacha and unfortunately, between 1998 to 2002, the exchange rate was very unstable which led to a public outcry.
Looking ahead with bated breath
The future does not look bright, at least according to authorities and analysts. These experts note that the forthcoming tripartite elections will increase money supply. Others also note that the anticipated rise in food prices and the recent aid freeze paints a gloomy future.
In the wake of the aid freeze by Malawi major donors, the RBM in a policy statement said it is going to implement a tight monetary policy in order to ensure continued improvements in the availability of foreign exchange in the market while at the same time dampening inflationary pressure.
In the policy statement, the bank says the goal of monetary policy is to build foreign exchange reserves and strengthen the bank’s capacity to manage the exchange rate in a more credible manner and to better cushion the economy against unanticipated shocks.
But Indigenous Business Association of Malawi (Ibam) president Mike Mlombwa in a telephone interview on Tuesday said commercial banks do not have sufficient foreign exchange as said by the government.
He argued that argued that the kwacha has been falling because the country’s foreign exchange position is being run down.
“The current situation in which the kwacha is falling on a daily basis is plus the aid freeze has spelt doom for Malawi businesses. At the moment traders are taking advantage of the situation by raising price of goods and services,” said Mlombwa.
But Finance Minister Maxwell Mkwezalamba was quoted in The Nation this week blaming the market for the depreciating kwacha.
Mkwezalamba argued that market players expect that there will be a forex shortage simply because of delayed disbursement in donor funds. He added that the RBM is sitting on about $400 million forex reserves assuring Malawians that the country will be okay in terms of foreign exchange position.
Malawi must get its economic fundamentals right. There is an urgent need to fix these otherwise the economy will continue going round and round in a viscous cycles. What is worrying for me is this growing confusion about the impact of official reserves on exchange rates and their role in supporting imports. This is a highly specialised area but the justification for bringing these issues in public debate forums is to broaden public awareness in support of the democratic process. In this day and age no problem should be a cryptogram but all must be addressed with correct and decisive deciphered solutions.
First up, the school of thought that says Malawi has enough official reserves $400m with plenty more in private companies hands and therefore the kwacha should not be depreciating further is misguided. That is equivalent to saying I have a million kwacha in the bank therefore maize prices must not go up. How much is in official reserves (or import cover) does not affect the exchange rate rise or fall. Secondly, the school of thought, which says Malawi, has a lot in official reserves to last until April is also misguided because official reserves in a floated mechanism do not take part in the import transactions. That view comes from the old fixed rate mentality where the kwacha had to be manually defended using official reserves. Ok, RBM occasionally intervenes every now and then (IMO) but in a very limited way, to let market dynamics determine equilibrium exchange rate. The issue of market panic in foreign exchange markets is real. On that note, I must play my part here and not add to the panic. The truth is the Malawi kwacha is in good shape following the IMF decision not to suspend its ECF tranche of $20m. That was so critical and a life and death situation! Now there will be no cardiac arrest for the Malawi economy on the horizon! No hyperinflation and no extreme kwacha devaluation will happen like last year. The kwacha is alive, phew!. Its temporary losing ground to the dollar must not cause panic because it is just suffering from “high fever” until April; caused by the country having nothing to export at this time. The little Malawi can export plus some aid flow (whatever your view on this aid issue) will help the kwacha not devalue excessively, in the short term.
The root cause of the “fever” is the agricultural policy of the past 50 years. In the past, these vulnerabilities were hidden by the use of fixed exchange rate but today the weaknesses of agriculture as a sole anchor of the national economy is there for all to see. Malawi economy stops exporting for 6 months, causing the kwacha to decline. The minimum requirement should have been to have agriculture exports cover one-half of the year and export of manufactured goods cover the other. That is why I believe these fiscal and monetary policy issues must now be brought in these public forums so when MPs promise “more agriculture”, every Malawian can stand up to them and demand investment in manufacturing to balance the economy and to create jobs. In fact, let it be known that Malawi is poor because of lack of manufacturing! Rich countries are rich because they have manufacturing. The UK discovered manufacturing (industrial revolution) and became a dominant world power. Europe copied and benefitted. The UK, like any responsible power do, banned all colonies including the US colony from manufacturing, especially steel. The US, fought Britain for the right to manufacture and overtook Britain in manufacturing output to become the world power. Japan took on the US in manufacturing and came close to overtaking it in GDP. The Asian tigers took on manufacturing and created wealthy for their sizes. China today has overtaken the US (since 2010) in manufacturing output and its GDP has grown to no 2 in the world. Right now, the US manufacturing giant has been awoken into action and is fighting back. What more evidence does Malawi need to adopt manufacturing as a failsafe national growth strategy? If it is a question of not knowing where to start on such an ambitious journey, then I am happy to provide the strategic thrust and oversight!
As for the question of exchange flotation causing inflation, prices for all imports (not locally produced goods) will adjust according to the exchange rate but here is the beauty of it. Since imported goods become expensive, Malawians choose alternative cheaper local substitutes. In case of things like imported fuel that cannot be substituted, few people will afford them and demand of fuel will fall; saving Malawi exchange rate from further getting worse if demand had continued growing. Floating is self-correcting. There are two non-monetary solutions to tackle the falling kwacha problem outside RBM a) a professional solution by finance ministry and b) the power of the consumer solution. a)The govt Finance ministry can hire an expert to review trade deficit on commodity codes and take action or b) if Malawian consumers mobilised to reduce importing or to reduce feasting on imported goods (both cheap and luxury) to a certain level, right here, right now, the kwacha will start to appreciate against the dollar, in this January 2014! This is truly a consumer sovereignty issue!!