The year 2022 will be a year to forget for most Malawians as shortage of foreign exchange reared its ugly face again.
It is also a year in which the economic circumstances reminded the authorities that no economy can grow sustainably without being led by exports.
As early as January 2022, the signs of forex shortage could be felt in the market. In the high street banks, it could take weeks for businesses to get the dollar.
The situation was further compounded by Russia’s invasion of Ukraine on February 24 as it drove up the prices of many imported items such as fuel, bread flour and even fertiliser, in dollar terms.
This exerted even more pressure on the already thin forex reserves.
Then the forex market started overheating.
The greenbuck had fled to the parallel market where it was fetching better prices of just above K1100.
Although the clear signs were there for all to see, the authorities kept the value of the kwacha at a superficial rate of around K835 to the dollar.
At the same time, official reserves kept on depleting resulting in a serious shortage of essential commodities such as drugs as the cosmetic official rate failed to attract dollars in the formal market.
Industry started wobbling as the imported raw materials needed to keep factories running became scarce.
In a desperate attempt to save the economy from collapsing, the Reserve Bank of Malawi on May 27, 2022 moved in and devalued the kwacha by 25 percent.
In a communication to authorised dealer banks (ADBs), dated May 26 2022, RBM Governor Wilson Banda argued that the decision had been arrived at to realign the exchange rate with economic fundamentals.
Banda said imbalances between supply and demand have been prevalent in the domestic foreign exchange market, evidenced by low foreign exchange supply, declining official foreign reserves and widening spread of rates on the market.
“In order to curb the practice and dissuade hoarders of foreign currency from this practice, the bank is informing ADBs to adjust exchange rate by 25 percent from the mid-rate as of 26th May 2022 to align to around the market clearing level with effect from 27th May 2022,” Banda said.
But before the monetary authorities had effected the 25 percent devaluation, economists Thomas Munthali and Frank Ngalande had earlier warned in their paper ‘Is Devaluation an Option for Malawi’s Current Debt Challenges’, against going that route.
Munthali and Ngalande argued that historically, Malawi has devalued its currency before with less similar results – not much growth in the economy, no change in its exports volumes, but instead baptised with an escalating inflation.
Malawi currency could bring a new wave of inflation, impacting the welfare of Malawians and further contracting the economy.
“In this regard, devaluation would cause more harm than good. The only case for justifying devaluation in Malawi, is simply making efforts to bring more of the forex into the official avenues so that those with forex should be encouraged to sell to official dealers such as banks or bureaus because the buying rate with the parallel/black market will not be very different,” they said.
Munthali and Ngalande were quick to point out that there still remained a danger of chasing the parallel market rate in an economy like Malawi where we do not produce enough exports to earn more forex.
If directing forex into the official avenues is to ever be the premise for justifying devaluation under the Enhanced Credit Facility being negotiated with the IMF currently, then it has to immediately be supported with huge initial inflows of balance of payment support from the IMF itself and the other development partners that are waiting on the wings such as the World Bank and European Union.
“This is because for such a devaluation to be effective, it needs to happen once and not in phases to avoid funnelling speculation. Without the adequate reserves for essential imports (import cover), disaster emanating from run-away inflation will be looming especially now when the Covid-19 and global economic events suggest otherwise for a net-importer country like Malawi,” reads the paper.
As predicted by Munthali and Ngalande, soon after the devaluation, the parallel market began to run away. With the official rate hovering around K1030 to the dollar, the black market is trading the green buck at just above K1,450.
With the black market buying the dollar at K1,400 or thereabouts, almost all the forex brought through the informal channels is refusing to be attracted into the formal financial system.
As a result, despite the 25 percent devaluation in May, the shortage of forex in the formal financial system has persisted thereby choking many essential services, including the supply of fuel.
From August 2022, Malawi started seeing the real impacts of the forex shortage as long fuel queues last seen on April 5, 2012 returned to the country.
The long fuel queues also led to the emergence of a fuel black market where unscrupulous traders skinned desperate motorists alive by selling them a litre of petrol at as high as K4000, more than double the normal price.
Even Finance Minister Sosten Gwengwe and RBM Governor Banda admitted in attachments to Malawi’s Letter of Intent to International Monetary Fund (IMF) Managing Director Kristalina Georgieva in November that the exchange rate spread had even widened after the revaluation.
“We took action to realign the exchange rate with the market clearing rate through a 25 percent one-off exchange rate adjustment at end-May 2022.
“The realignment narrowed the exchange spread with the forex bureau rate from over 28 percent at end-April 2022 to 2 percent at end-May 2022, but the spread has since widened due to continuing speculation and forex shortages. Subsequently, we will aim to maintain the value of the kwacha market driven,” Gwengwe and Banda said.
In its 16th Malawi Economic Monitor, the World Bank says exports of Malawi’s top export crop, tobacco, have consistently declined, and other leading export sectors have not been able to provide sufficient inflows of foreign exchange.
One could not be faulted to conclude that Malawi may find itself in the same forex scenario in the years to come unless the crucial supply side of the forex equation is given the necessary attention.