Current exchange rate regime hurting Malawians

The IMF mission which visited Malawi from 1-12 December 2011 has sternly warned the government to liberalise the foreign exchange market or continue sinking in the current economic woes which will worsen in a short period of time. The mission was requested by the Ministry of Finance and Economic Developent (MFDP) and it comprised of Messrs Jafarov and Eckhold of the IMF Money and Capital Markets Department (MCM), Mr Jonassen from Norges Bank and Ms Rendak from the IMF Legal Department.

The main objective of the mission was to help the Malawi authorities “in assessing how the current legal framework and practice needs to be reformed” in order to achieve full liberization of the foreign exchange rate regime and enhance flexibility of the system.

Working with the Ministry of Finance and Reserve Bank, the Mission has developed an action plan that is aimed at assisting the Government in achieving a fully liberalised and flexible exchange rate regime.

Malawi’s Floating vs Fixed Exchange Rate and DPP Government

Malawi adopted a floating exchange rate regime at the dawn of multiparty politics in 1994. Under this system, the Kwacha’s price relative to other currencies is supposed to fluctuate according to forces of supply and demand on the foreign exchange market. However, in order to attain sustainable balance of payments positions, real income growth and stable domestic prices, the Reserve Bank of Malawi is supposed to intervene in the market sparingly in order to manage the exchange rate. Unfortunately, under the current DPP led Government of Bingu wa Mutharika, this intervention has been taken to the extreme where instead of a sparse intervention, a full fledged fixed exchange rate regime has been implemented.

Under this system, also known as a pegged exchange rate system, the Kwacha’s value has been matched to the USD, the GBP and the ZAR without regard to market and economic forces. Consequently, as affirmed in a report by the recent IMF mission, Malawi continues to experience an acute shortage of foreign exchange as the pegging has overvalued the Kwacha.

In order to ensure that economic agents adhere to these rates, the Government implemented tight administrative regulations which according to the IMF mission, are “increasingly difficult to implement”, resulting in a significant share of trade moving to the parallel or black market.

Evidence gathered by Nyasa Times shows that indeed the black market is thriving under the current system. While the official rate of the Kwacha to the GBP may be fixed at MK270 to GBP, punters on the parallel market are willing to pay MK360/GBP, some even as high as MK400. Similary, the USD is trading on the parallel market at MK280 instead of the official rate of MK180.

Economic Bleeding, Barter Trade and Abuse of System

The IMF mission report clearly indicates that the Malawi economy is bleeding, is in tatters and needs quick fixing. If the current status quo continues, the economic future for Malawi is very bleak and may take years to recover. The IMF mission found out from private sector contacts that the current regime has adverse effects on business. Specifically, the IMF points out that “the current regime not only hurts exporters, but also production and employment in general, as the chronic FX shortage has led to reduced imports of raw materials, fuel, spare parts, and other critical imports”.

It further states that “anecdotal evidence suggests that market players try to avoid these restrictions through under-invoicing, barter trade, side payments, and other similar activities”. In addition to these adverse economic effects, Nyasa Times has found that the current system is being abused by the authorities as Foreign exchange is usually allocated based on cronyism and sympathisers of the current Government.

Government officials and DPP party cadres have been able to import high value goods and travel abroad despite there being limits on FX. The president himself is a jet-setting individual who spends more time in the skies than at the State House, as evidenced recently when he went for a two month long holiday and then went to Qatar to attend a student conference.

Resistance to Change, DPP’s Lack of Credibility and Advice on Devaluation

Despite acknowledging that the current system has failed and that Malawians are suffering, there is resistance by the DPP led government and its officials to move to a liberalized exchange system. Apparently the authorities prefer “to move gradually and guide market prices through mechanism such as an exchange rate band”. This is seen by many commentators as attempts by the officials to keep a stranglehold on the system in order sustain the abuse and corruption.

Interestingly, the IMF mission is against this, arguing that “low levels of reserves” coupled with “the damage made to the credibility of the authorities by loose macroeconomic policies and the authorities’ track record in the area of the FX regime have rendered any peg-like regime such as a band not credible at the moment”.

Subsequently, the IMF mission has advised the Government to prepare for for a “quick but staged process towards more exchange rate flexibility”. Furthermore, the Malawi officials have been advised to “immediately start implementing tight monetary and fiscal policies and reduce the liquidity overhang, created in July-October, through issuing short- and long-term instruments which would then be followed by a large devaluation, an announcement of the intention to operate freely floating exchange regime, removal of restrictions on FX bureau rates, and setting the official rate with reference to traded markets”.

These measures are to be implemented within 1-3 months, the IMF mission further adds. However, knowing how stubborn and inconsiderate the DPP led government under Bingu wa Mutharika is, it is yet to be seen if these recommendations will be implemented.

With hunger prevalent in certain parts of the country and the economy fast in reverse gear, Malawians must brace themselves for tough times ahead.

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