Malawi won’t fix weak Kwacha exchange rate– Finance Minister

Finance Minister Goodall Gondwe  has said the Peter Mutharika administration is not contemplating reverting to a managed exchange rate regime as a way of containing the continued depreciation of Malawi’s national currency. The kwacha is trading at about 520 to the dollar, down from 410 in September.

There have been widespread  speculation that it is now the government’s thinking that in the absence of substantial foreign exchange inflows from donors, the kwacha cannot be left to float so freely.

Other government economists observed that with reserves below one month of import cover and without any sign of improvement in the near future, the free floating currency is not sustainable for Malawi at the moment.

But Gondwe denied that the government is planning to revert to fixing the currency to the dollar, as was the case during the late President Bingu Mutharika’s administration.

The Finance Minister said the government is considering short- and long-term solutions to slow the depreciation.

“The short term is that we are looking for resources and we are about to get them to bring into the market to increase the demand for the Kwacha,” Gondwe said on Voice of America (VOA). “In the long term, Malawians will have to work hard, to diversify and produce more products to export. Everybody knows that.”

Gondwe said there was no need for Malawians to panic because “this is not the first time for the kwacha to fall.”

During much of 2012, Gondwe said, “there was much faster depreciation than we are experiencing now. Do not forget that. We started from 160 [kwachas to the dollar] to about 460. So this is not new for Malawians themselves.”

The kwacha has been unstable since 2012, when the administration of former President Joyce Banda floated the currency to let market forces determine its value.

It is more stable during tobacco marketing season, between March and September, when the country generates a lot of foreign exchange from tobacco sales.

Prominent Malawi economist Thomas Munthali told VOA he was troubled by the rate of decline, saying there was a strong chance of a “very high inflation level that would erode the purchasing power. And this would escalate into pressure of workers asking for higher wages.

“And at the same time,” he said, “the industry will be faced with tough times because the interest rates are likely to go up.”

Reserve Bank of Malawi Governor Charles Chuka is on record saying there is still a limit to which the Kwacha can depreciate.

He said while it is difficult to estimate that limit, it is definitely the amount of money to purchase hard currency that matters most.

“This is where the Reserve Bank of Malawi comes in – to balance the supply of money to economic activity and in so doing contain inflation and exchange rate stability,” said Chuka.

He noted, however, that such type of work is made extremely difficult when the government of the day is forced to print money.

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