When pressure mounts to abandon kwacha floatation

It is exactly nine months since the Reserve Bank of Malawi (RBM) boldly devalued the local currency by a whopping 49 percent and subsequently adopted a floated exchangerate regime.

Today, it is undeniable that the Malawi economy has been turned into a battle field. There is a myriad schools of thought that have erupted over which exchange rate regime the country should pursue, or simply put, whether Malawi should abandon the kwacha floatation or stay the course with the regime.

The RBM Monetary Policy Committee (MPC) is a collection of a cream of economic experts and, surely, had weighed all necessary pros and cons of a floated exchange rate regime before it agreed to adopt it.

RBM Governor Charles Chuka has recently been boasting that the central bank now has a greater degree of independence unlike in the past. This could imply, with the benefit of the doubt, that the decision to skew towards a floated exchange rate regime was not politically influenced.

Prior to May 7, 2012 when the Joyce Banda administration adopted its economic reforms, the International Monetary Fund (IMF) had repeatedly asked the late president Bingu wa Mutharika to ‘clear distortions’ in the foreign exchange market, but did not specifically tell the landlocked nation to float the currency.

Floatation

A floating exchange rate, or in other words, a fluctuating exchange rate is a type of exchange rate regime wherein a currency’s value is allowed to fluctuate according to forces of demand and supply on the market.

Worldwide, the primary argument for a floating exchange rate is that it allows monetary policies to be used for other purposes.

Local advocates of a floated exchange rate regime have said that already, the new floated currency has improved the availability of forex and will also improve the importation of items such as fuel, fertiliser, medicines and raw materials for industries.

Malawi’s Finance Minister Ken Lipenga believes giving RBM a great deal of independence to determine monetary policy and manage the exchange rate in line with market principles will be critical.

Countries such as Tanzania, Ghana and some from eastern Asia have seen their currencies floated and it has borne fruits.

Under fixed rates, monetary policy is committed to the single goal of maintaining exchange rate at its announced level.

International monetary experts share a common denominator that in a system of floated exchange rate, monetary policy makers are free to pursue other goals such as stabilising employment or prices and also stimulate gross domestic product (GDP).

Back home, debate on whether Malawi should stay put with the floated exchange regimer abandon the system continues to dominate discussions, be it in public passenger transport or at drinking joints, where ordinary Malawians have turned themselves into experts in dissecting exchange rate systems.

It is an undisputable fact that Malawians from all walks of life have not been spared from the wrath of high cost of living currently prevailing in the country in the aftermath of the adoption of the floated exchange rate regime, among other economic reforms, embraced by the 10-month old administration.

The cost of dried fish at a very local market, orange squash, tomatoes, onions, sugar, salt and even the celebrated small fish known as bonya has skyrocketed as compared to the same period last year.

Critics

The cost of importing foreign materials and, in particular, strategic raw materials for industry, medicines and pharmaceuticals has jumped to a record high as the exchange rate continues to depreciate each passing day.

Investment advisory firm, Nico Asset Managers Limited, has times without number spoken of the severe impact that a floated exchange regime can unleash to a landlocked Malawi since the system was adopted.

Money market analyst James Chikavu Nyirenda is also conscious of tough expedition that Malawi has embarked on with the adoption of a floated currency.

He warns that the sustainability of the new floated regime could be a challenge to monetary policy makers especially in the wake of Malawi’s inability to accumulate foreign exchange.

“How do you support a floated currency when you don’t have reserves?” queried Nyirenda, adding: “The price of the currency can hit any price which is not good for business.”

Consumers

It has taken the Consumers Association of Malawi (Cama) to incorporate the discontinuance of a floated currency in its petition presented to government on January 17 this year when it organised national wide demonstrations.

Cama executive director John Kapito believes the best way to go is to manage the exchange rate by putting a band within which the kwacha should swirl.

He is backed by other vexed critics of a floated currency, including politicians who maintain that the decision to float the kwacha was ill-timed as it was not backed by enough foreign reserves.

But listening to Chuka and the Minister of Economic Planning and Development Goodal Gondwe, it seems government is not ready to abandon the floatation and, this simply means, consumers should brace for more price increases of basic goods and services if the kwacha will continue fluctuating.

“Any attempt to abandon this exchange rate system will make matters worse. The market-determined exchange rate is the best for Malawi,” argued Chuka, recently.

Comfort zone

It is clear from his recent pronouncements that the central bank is comfortable with the current exchange rate system which Malawi is following.

Gondwe is also seemingly annoyed with the calls to abandon the floated exchange rate regime, saying the worst thing the Malawi Government can do is to abandon the floatation of the currency.

“For example, the devaluation and floatation of the exchange rate which is expected to unify official exchange rate and the parallel exchange rate, is already about to achieve its goal since the difference between the official and parallel rate is expected to be unified very soon and, thereafter, the exchange rate can stabilise,” he said last week.

But the economic reforms seem also to be backed by the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) which has noted that most of the reforms that government is implementing are bearing fruits, noting that the kwacha has already shown signs of stabilising.

IMF boss, Christine Lagarde who was in the country last month, advised Malawi not to tamper with the reforms, but rather ‘stay the course.’

Since the monetary policy move last year, varied opinions have clashed over the exchange rate system Malawi should adopt, but what is necessary is for the authorities in the driving seat not to relax, but make the exchange rate more competitive by ensuring that farmers and exporters get enough wealth out of their sweat.