The Reserve Bank of Malawi (RBM) has said it is watching with keen interest developments on the foreign exchange market and will not allow a runaway exchange rate.
RBM Governor Wilson Banda was speaking in Mangochi on Thursday on the sidelines of the 2020 Economics Association of Malawi Annual Conference.
The Kwacha has come under immense pressure in recent months due to, among other things, weak earnings from the country’s top foreign exchange earner, tobacco.
As at Friday, foreign exchange bureaus were selling the US Dollar at around K855 while the British Pound was selling at an average rate of K1050.
Banda said, while the central bank was committed to maintaining a flexible exchange rate regime, it would not allow a run-away exchange rate because it has harmful effects on the economy.
The governor said, from July this year, the exchange rate has depreciated and it was going to continue responding to economic fundamentals.
“If pressures on the balance of payment persist, and the country’s foreign currency reserves remain thin on the ground, and demand shoots through the roof, obviously the exchange rate has to give way.
“But we are also mindful of the fact that we will not allow a runaway exchange rate because it has got those harmful effects
on the economy. We are very mindful of what is happening to the exchange rate and we are monitoring it very closely,” Banda said.
He added that RBM was carefully monitoring what was happening in the region— in countries such as Zimbabwe, South Africa and Tanzania— to make sure that the monetary authorities know what is happening in those countries to make sure that the exchange rate was properly aligned.
“The short answer to your question is that we will not maintain a fixed exchange rate.
We will allow our exchange rate to respond to economic fundamentals,” Banda said.
This year, Malawi only sold 113 million kilogrammes (kg) compared to 165.5 million kgsof tobacco sold in 2019.
In its October 2020 Economic Report, investment management and advisory firm Nico Asset Managers says it expects the rate of depreciation of the kwacha to be moderated as aid inflows to assist in the fight against the coronavirus pandemic have started to come in.
“The impact of recent aid inflows has reflected in increased forex reserves recorded in October 2020. Further aid inflows are expected to help narrow the external imbalances relative to the float of the Kwacha in the upcoming months and as the governments of Malawi embark on projects following the 2020/21 fiscal year budget.
“This will improveinvestor confidence from 2021 and increased earnings from agricultural exports was expected to provide modest support for the Kwacha,” the report reads.