Kwacha devalued by 44%

By Chimwemwe Mangazi & Taonga Sabola:

After months of hesitation, the Reserve Bank of Malawi (RBM) Wednesday announced a whopping 44 percent devaluation of the Kwacha, coming closer to the 49 percent slump effected by the Joyce Banda administration in May 2012.

Following the downgrading, the dollar will from today be selling at K1,700 from K1,180.29.

RBM said the devaluation stemmed from its assessment of the Kwacha, which showed that supply-demand imbalances remained in the market despite adjustments of the rate through the auction system.

“Arbitrage opportunities have resurfaced in the market due to the mismatch in exchange rates in the cash and TT markets.

“Spot checks on some market players indicate that the market is able to clear import bills at this rate,” the central bank said in a statement signed by its governor, Wilson Banda.

A TT (telegraphic transfer) rate is a rate at which a bank converts foreign currency into local currency.

The devaluation has come barely a week before the International Monetary Fund (IMF) Executive Board scrutinises Malawi’s Eligibility for the Extended Credit Facility (ECF).

The IMF Board is scheduled to meet in Washington DC on November 15.

The overvalued exchange rate and unsustainable public debt have been major concerns for the Bretton Woods institution throughout negotiations for the four-year $174 million ECF programme.

Experts yesterday warned that the “lump-sum” 44 percent devaluation is likely going to hurt the poorest of the poor as it will trigger a jump in commodity prices since Malawi is a net importing nation.

Scotland-based economist Velli Nyirongo said supply and demand imbalances in the foreign exchange market have piled pressure on the Kwacha.

Nyirongo noted that the demand for forex has been outpacing the supply and that the central bank’s foreign exchange reserves have been declining, limiting its ability to intervene in the market to support the Kwacha.

“In this regard, RBM should consider allowing the Kwacha to depreciate freely and avoid excessive intervention.

“This could help to curtail speculation and encourage the repatriation of funds from the black market back into the formal economy,” Nyirongo said.

Malawi Confederation of Chambers of Commerce and Industry President Lekani Katandula is of the view that the decision to devalue the Kwacha is tough but necessary.

Katandula said it may translate to higher prices for some goods, especially those with an import element, which might be tough for Malawians, but that it is better than running out of key goods like fuel and medicines.

“On the positive side, this should meet one of the key conditions for the [ECF] and if that comes through, then we should have improved forex supply soon. It will also encourage exports whilst discouraging unnecessary imports,” Katandula said.

In a separate interview, Malawi University of Business and Applied Sciences-based economist Betchani Tchereni said despite the increase in prices that may follow, the decision assures of macro-economic stability.

“It is a necessary evil. Macroeconomic stability is very important for economic growth. This is going to help bring that stability.

“Of course, people are going to be hurt, prices are going to rise, but this will help clear the market as the official rate has come close to that on the black market,” Tchereni said.

Chief Executive Officer of the Institute of Chartered Accountants in Malawi Noel Zigowa holds a contrary view, arguing that the challenge that Malawi is facing will not be solved by the devaluation of the Kwacha.

Zigowa said what Malawi is lacking is productivity, which the government, through its different ministries, has failed to address.

“We need to be a country that promotes productivity more than consumption. We need to address the import-export gap by promoting what we can produce in large quantities for export.

“The settlement of bills at a higher rate just shows that Malawians are stranded and have no option. The main effect of this is more pain on the ordinary Malawian,” he said.

He further feared that as Malawians prepare for the next farming season, farm inputs will “most likely” be out of the reach of many.

Zigowa further warned that fuel and food will be expensive, thereby eroding employees’ salary value.

“It is more and more pain for the Malawian and creating another season of hunger,” Zigowa said.

According to MCCCI, the economy is consuming an estimated $250 million per month on imports while revenue from tobacco has averaged less than $200 million in recent years.

RBM data show that the official forex reserves for August 2023 decreased to $239.56 million or 0.96 months’ of import cover, against the recommended rate of 3.9 months for credit-constrained economies.

In May last year, government devalued the Kwacha by 25 percent in what was seen as a return to a market-determined foreign exchange rate regime to prop up dwindling forex reserves.

RBM has in recent times been effecting min devaluations on the currency following its forex auctions