Governor speaks on forex auctions
Reserve Bank of Malawi Governor (RBM) Wilson Banda has said the bank has not completely abandoned forex auctions it introduced in January.
The central bank had introduced the forex auction system as a price discovery mechanism in the exchange rate market.
But three months after the results of the first auction were discarded, there has been deafening silence from the monetary authorities on the matter.
But in an interview at the weekend, Banda said there is a need for further discussions with banks on the matter.
“The short answer is that auctions have not been abandoned but there is a need for further consultations with banks. They play a central role in the price discovery auction,” Banda said.
During the first forex auction, only three of the country’s nine commercial banks took part.
The setup of the forex auction was that authorised dealer banks would be submitting bids to sell foreign exchange to the central bank at prices or exchange rates freely determined by each participating bank.
The bids were supposed to be for a minimum of $50,000 and in multiples of $10,000 thereafter.
In Malawi’s November 2022 Memorandum of Economic and Financial Policies to the International Monetary Fund (IMF), Finance Minister Sosten Gwengwe and the RBM governor promised to facilitate price formation processes in the market by arranging small pilot foreign exchange auctions.
This, according to Gwengwe and Banda, would help determine the market-clearing exchange rate and facilitate development of the interbank forex market.
To further build external buffers, Gwengwe and Banda promised the IMF that Malawi would slow down direct foreign exchange sales to the market in support of imports.
“In any event, RBM will become a net purchaser of foreign exchange. Concurrently, we will gradually wind down the existing swap open position as guided by the foreign exchange accumulation path. We believe that pursuing this reserve accumulation strategy will help [us] achieve a three-months import cover by the end of the medium term.
“Moreover, we will monitor reserve liabilities so that RBM’s net international reserves (NIR) will reach an adequate level as quickly as possible,” the authorities said.
But former Finance Minister Joseph Mwanamvekha has faulted the monetary authorities for the decision to introduce forex auctions, saying it will lead to further devaluation or loss of value for the Kwacha.
Mwanamvekha said this policy regime was pursued by RBM in early 1990s up to 1995 during the Structural Adjustment Programmes.
“I was at the Reserve Bank of Malawi at that time and was working in the Financial Market Operations Department and was part of the team managing this policy regime. It failed miserably and was later abandoned.” Mwanamvekha said.