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Kwacha devalued by 25 percent

By William Kumwembe

There is panic among consumers and experts over a possible continued rise in commodity prices after the local currency, the Kwacha, has been devalued by an estimated 25 percent.

The local unit has been devalued as part of the government’s desperate attempt to have a new International Monetary Fund (IMF) Extended Credit Facility (ECF) programme in place to help cushion it from prevailing economic woes.

The IMF team is in the country for negotiations on the ECF, which Malawi desperately needs to revamp its ailing economy.

In a communication to authorised dealer banks (ADBs), dated May 26 2022, Reserve Bank of Malawi (RBM) Governor Wilson Banda says the decision has 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.

This, according to Banda, has, in the recent past, led to the misalignment of the exchange rate to economic fundamentals.

“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,” the communication reads.

Economists forewarned that the government needed to exercise caution before moving to devalue the local currency, the Kwacha—a stance they feared could further push headline inflation upwards.

In their paper, titled ‘Is Devaluation an Option for Malawi’s Current Debt Challenges’, economists Thomas Muthali, who is also Director-General for the National Planning Commission, and Frank Ngalande feel that, in the country’s case, devaluation can “at best simply fuel inflation”.

In the paper, Munthali and Ngalande argue that, without adequate reserves for essential imports, disaster, largely emanating from run-away inflation— already at 14.7 percent— will be looming.

Economics Association of Malawi Executive Director Frank Chikuta maintained that devaluation remained a necessary evil in addressing economic woes.

“Yes, we need to make adjustments and we need to make them now because delaying means that we will have to make a huge adjustment in future, which means it is going to be more painful than if we were to make the adjustment now.

“But, when making the changes, we should bear in mind that there are some very vulnerable groups in the country. So, we need to ensure that social safety nets are safeguarded and we need to make sure that the economic agents that produce for this country are also protected,” he said.

In an interview yesterday Malawi University of Science and Technology-based economist Betchani Tchereni said the consumers should, in the short term, expect prices of most commodities to rise.

“This is bad for many poor people in Malawi. Earnings will be wiped out and welfare losses will be rampant,” he said.

Another economist, Milward Tobias, said the long-term remedy to the problem remains boosting supply of foreign exchange and reducing demand for forex.

Forex woes have, in the recent past, affected almost all sectors of the economy.

When Malawi, a net importer, floated its currency in 2012, inflation jumped supersonically from 7.6 percent in 2011 to 21.3 percent in 2021 and further to 28.3 percent in 2017.

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