Lipenga ‘schools’ Chikaonda on Malawi’s exchange rate

Minister of Finance Ken Lipenga has cleared what he calls “misunderstanding” on an exchange rate system, saying it is currently determined by market forces of supply and demand.

Recently, a former minister of Finance as well as Economic Planning and Development and ex-Reserve Bank of Malawi (RBM) governor, Professor Matthews Chikaonda during a public debate on  ERP in Lilongwe organised by the Economics Association of Malawi (Ecama) last Friday , provided his input on the country’s exchange rate regime adopted by the Joyce Banda administration in May last year.

Chikaonda who is group CEO for Press Corporation Limited (PCL), one of Malawi’s leading business entities, said Malawi needs an exchange rate system that is competitive enough to grow the economy.

Some participants at the debate pleaded with government to revert to the fixed exchange rate regime which was widely employed by former president Bingu wa Mutharika’s administration.

Lipenga: There is misunderstanding
Lipenga: There is misunderstanding

But in his comments published in The Nation newspaper on Wednesday, Finance Minister Lipenga who also served late Mutharika on the same role explained that monetary and fiscal policies the Joyce Banda administration is implementing now are “a part of a whole package of measures whose purpose and intended consequences we have explained time and again. You cannot actually treat one part in isolation.”

Clearing what he called “widespread misunderstanding” of the current exchange rate regime in Malawi, Lipenga said: “The floatation of the kwacha simply means the exchange rate is now largely determined by market forces of supply and demand. This facilitates attainment of a competitive exchange rate which this country badly needs to balance the supply and demand for foreign exchange by encouraging export diversification.”

He added: “Without a competitive exchange rate, efforts aimed at diversifying the economy cannot be sustainable.”

Said Lipenga: “The misunderstanding in the market is that by letting the kwacha exchange rate to market forces, the Reserve Bank of Malawi is not managing the kwacha at all. In actual fact, the kwacha exchange rate regime is technically described as a ‘managed float’ in contrast to a ‘free float’.

“It is a managed float because the central bank implements monetary policies that are aimed at containing inflation including through stabilising the exchange rate.”

Minister of Economic Planning and Development, Goodall Gondwe recently told journalists that floatation of the exchange rate and parallel exchange rate were expected to unify in not too distant future given that the difference between the official and parallel rate had now dropped from more than 80 per cent to less than 5 per cent.

“It is, therefore, expected that the rate would be unified very soon and that thereafter the exchange rate can stabilize,” Gondwe said.

Government devalued the local currency by 49 percent in May last year and adopted a floated exchange rate regime, apparently succumbing to pressure from the International Monetary Fund (IMF) which earlier had asked the Mutharika administration to “clear distortions” in the exchange rate system.

Since the adoption of the floating exchange rate regime, there has been a general outcry by several quarters, championed by the Consumers Association of Malawi (Cama).

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