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‘Devaluation could hurt poor Malawians’

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John Kapito

The Consumers Association of Malawi (Cama) has said yielding to external pressure to devalue the Kwacha without strategies to cushion Malawians could spell doom for poor consumers already struggling to make ends meet.

Cama Executive Director John Kapito was reacting to calls from institutions, including the International Monetary Fund (IMF), which have advised authorities to allow for greater flexibility in the exchange rate.

As at noon Tuesday, the Kwacha was trading at an average price of K825 to the dollar in high-street banks and around K950 to the green buck on the black market.

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In its Country Report No. 21/269, IMF said given the chronic shortages of foreign exchange and low reserves, and to support the start of the adjustment, a rapid adjustment towards a market-clearing exchange rate is necessary.

According to IMF, with the anticipation of an adjustment at a future time, hoarding of foreign exchange by market participants may be exacerbating shortages.

But Kapito said devaluing the currency would spell doom to Malawians.

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“Devaluing the Kwacha would mean seeing an immediate jump in the cost of goods and services. At the same time, there will be no corresponding increases to incomes of people.

“There is nothing that Malawians would benefit from a devalued Kwacha because Malawi is a net importer. We import almost everything and export close to nothing,” Kapito said.

Kapito observed that if the authorities bow down to pressure and devalue the currency, they should know that they are at the same time devaluing the lives of Malawians to zero.

He was quick to note that if not well handled, the devaluation has potential to spark serious demonstrations.

In its policy advice to the Malawi Government, the IMF admits that the adjustment towards a market-clearing rate may be accompanied by a temporary spike in prices and that it does not have to be followed by a prolonged period of Kwacha deprecation and inflation as in the case of 2012-16 episode, if the RBM is committed to containing reserve money growth.

“It is important to support this adjustment with a credible fiscal adjustment programme. In the 2012 episode, the fiscal policy stance was not compatible with the tight monetary policy stance.

“The deficit from 2012-13 to 2015-16 averaged 7 percent of GDP; and in 2012-13 the deficit widened by 2 percent of GDP (from 5.8 to 7.8 percent). Thus, there was continued pressure on the exchange rate, and hence inflation,” the IMF says.

But in its response contained in the IMF report, the Malawi Government said it is of the view that allowing for a rapid greater flexibility in the exchange rate will result in a spike in inflation as was observed in the 2012 episode.

Recently, the Economics Association of Malawi (Ecama) and the Financial Market Dealers Association (Fimda) questioned the valuation of the local trading unit, the Kwacha, against major trading currencies, saying the current fundamentals do not support the stability of the Kwacha.

Ecama Executive Director Frank Chikuta said the body is of the view that the exchange rate should be correctly valued to support exports and contain imports.

On his part, Fimda President Maclewen Sikwese noted that the Kwacha has been overvalued since 2018 but that the level of the overvaluation is steeper now than it been since then and continues to increase.

“Principally the overvaluation has been a function of artificial controls in the level of the Kwacha which has, from 2018, not been allowed to respond to market demand and supply dynamics.

“Whilst theoretically a fair valued exchange rate should help rein in on imports and boost exports from affordability and competitiveness perspectives respectively, what is critical is to look at the sensitivity of our exports and imports to exchange rate changes,” Sikwese said.

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