Malawi’s kwacha is expected to stabilise in the next few days after it broke through a series of record lows against the dollar, Minister of Finance, Economic Planning and Development Goodall Gondwe has said.
The minister said this on Friday in Lilongwe during the presentation of the Mid Year Budget Review Statement in Parliament.
“It is, therefore, expected that the [kwacha exchange] rate should stabilise soon and those speculations that are perpetuating the depreciation should take note of this,” he said.
Gondwe said the exchange rate policy that adopted a free floating exchange rate in 2012, at the behest of the IMF, meant that thereafter the exchange rate would be left to the market forces to determine its level.
“It was known at the time that a diminishing foreign exchange supply against a persistent high demand for forex would lead to a continued depreciation of the Kwacha until a point of equilibrium is reached,” said Gondwe.
Gondwe said the consequence of a loss of foreign exchange subsequent to donor withdrawal of budget support and dwindling of tobacco export earnings has been a continuation depreciating of exchange rate between May, 2012 and May, 2014 the rate depreciated by 215% from K165 to K520 per US$ and between June, 2015 and 52% between June 2015 and December, 2015.
“The government feels that the point of equilibrium has been reached already, and has also implied by the Reserve Bank in its statement on the exchange rate recently,” he said.
In economics, equilibrium is a state in which forces such as supply and demand are balanced, and in the absence of external influences, the value of economic variables.
This then means, Kwacha value will not change.
But Gondwe said it is “expected” that the rate should “stabilise soon”.
He told the House that government had an intervening period of currency stability between October 2014 and June 2015 when the policy measures that the Reserve Bank took and the currency swaps that it involved the purchasing of government debt denominated in kwacha by the PTA Bank using dollars, briefly restored order in the foreign exchange market and the exchange rate steadily appreciated to K450 per dollar.
“The swap transaction also helped to increase official foreign exchange reserves to more than US$620 million, the highest ever reached since independence. However, the market forces emerged yet again to subject the rate to an almost depreciation,” said Gonwe.
The Finance Minister said government is determined that the macroeconomic stability must be achieved, in particular, that interest rates should be low for Malawi to resume economic growth rate and achieve food sufficiency.
The kwacha is trading at K765 to a dollar.Follow and Subscribe Nyasa TV :