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Kwacha fate Tuesday

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CHILIMA —The banking sector is like a cartel

Malawians will Tuesday know the direction in which the local currency will go following the forex auction held on Tuesday.

As at Friday, foreign exchange bureaux were buying the kwacha at around K1,400 to the dollar and selling it at around K1,500 to the green buck.

Financial market players told Times’s Business at the weekend that, following the Friday auction, the Reserve Bank of Malawi (RBM) is expected to announce the bids tomorrow morning.

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RBM intends to use the auctions to discover, determine and maintain a market clearing level for the Kwacha against other major currencies.

According to players, the central bank indicated that settlement for the successful bids will be on Tuesday, January 17.

Financial Market Dealers Association President Leslie Fatch, while confirming the settlement date yesterday, said, on the pricing mechanism, they are happy as an association as the auctions would lead to responsiveness of the currency to demand and supply forces, and would also lead to transparent pricing of the currency.

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“On the social economic level, we note that the auctions do not solve the underlying pressure on supply.

“As such, the responsiveness through the auctions will likely be detrimental as the rate may depreciate faster, which will likely reflect in increasing inflation due to the country’s dependence on imports,” Fatch said.

Former Economics Association of Malawi executive director Edward Chilima said the development is an attempt to implement the floating exchange rate regime.

He said commercial banks will be offering exchange rate of the foreign currencies to RBM and that, based on these offer prices, the RBM will determine exchange rate for the currencies for a particular period.

“This is a more market-oriented approach. But the worry is how will the commercial banks behave on these auctions? It is worrying given the history of Malawi commercial banks, which are very much profit oriented. The banking sector is like a cartel. The market has shortage of currency.

“I am personally worried with the outcome of this exercise, not because of it, but because of my long-time fear of how banks behave in Malawi. We are likely to see a very fragile and unstable exchange rate regime,” Chilima said.

RBM spokesperson Ralph Tseka was not immediately available for a comment Tuesday.

On Friday, former finance minister Joseph Mwanamvekha faulted the monetary authorities for rolling out the forex auctions, saying they will lead to further massive devaluation or loss of value for the Kwacha.

Mwanamvekha said the policy regime was pursued by RBM in the early 1990s up to 1995 during the Structural Adjustment Programmes (SAPs).

“I was at the Reserve Bank of Malawi at that time and was working in Financial Market Operations Department and was part of the team managing this policy regime. It failed miserably and was later abandoned.

“At that time, the auctions system of foreign exchange was meant to improve the country’s export competitiveness, provide efficient foreign exchange allocation to banks, maintain price stability, dampen speculative attacks on the Kwacha and restore investor and donor confidence. All these objectives were never achieved and, in fact, the opposite was achieved,” Mwanamvekha said.

In a statement on Thursday, RBM Governor Wilson Banda said, during the auctions, authorised dealer banks will be submitting bids to sell foreign exchange to the central bank at prices or exchange rates freely determined by each participating bank.

Banda said the bids shall be for a minimum of $50,000 and in multiples of $10,000 thereafter.

“These auctions will facilitate the discovery of a prevailing market clearing exchange rate for the Kwacha against major currencies and thereby promote transparency in the determination of the exchange rate,” Banda said.

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