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RBM looks helpless on currency depreciation

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All along, we have been made to believe that good foreign exchange reserves are what the country needs to maintain stability of the local currency.

And indeed after several years of the country living on meager reserves of way below the standard import cover of 3 months, the Peter Mutharika government found a way of stocking the lockers at the central bank with good amounts of dollars and rands.

Since the beginning of the year, Malawi has maintained an import cover above the much talked about 3 months, a development that saw the kwacha appreciating at some point.

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The country, however, got a rude awakening some weeks ago when the kwacha suddenly started depreciating not only at a time the reserves are still high and bursting but also while tobacco sales are progressing at the auction floors, generating dollars for the country on a daily basis.

This seems to have surprised not only the government and the Reserve Bank of Malawi (RBM) but also the International Monetary Fund (IMF) whose programme with the country is centred on boosting forex reserves and stabilising the exchange rate.

Explanations for the development have varied; with most accusing dealer banks of speculative trading while others have suggested that authorities may have deliberately induced depreciation through banks to help tobacco growers earn more at the auction floors in kwacha terms.

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The suggestion of deliberate manipulation, however, doesn’t seem to hold water, especially looking at the actions RBM has taken in its attempt the arrest the depreciation.

Among other things, the central bank has introduced some exchange control measures as a way of managing of the dealer banks behavior in the trading of the foreign currency.

Secondly, RBM has reduced the Liquidity Reserve Requirement (LRR) ratio – which is the minimum amount of money banks are supposed to keep at the central bank, from 15 to 7.5 percent probably to help the banks find another way of earning income through increased lending other than relying too much on exchange rate gains.

All these, however, seem contradictory and only point to a monetary authority that is lost and not sure of what it should do to take control of the situation.

First of all, the controls are a departure from the exchange rate liberalisation policy adopted by the Malawi government and the central bank in 2012 which entails that the pricing of forex and trading practices on the market will be left in the hands of the market.

Secondly, influencing a reduction of commercial bank lending rates at the time the kwacha is depreciating could fuel the problem instead of putting it under control.

This is because cheaper borrowing could encourage businesses and consumers to acquire loans from commercial banks for importation of various materials, thereby further increasing demand for foreign currency in the market.

That, to me, would only cause further depreciation of the kwacha.

While the economy indeed needs lower interest rates to encourage production, timing for reduction of the lending rates is also critical for the economy. Reducing the rates at a time the exchange rate is under strain could prove to be suicidal rather than beneficial to the economy.

The central bank should probably have taken the move a few months ago when the kwacha was stable or appreciating rather than wait for the emergence of the lean period to induce reductions in the lending rates.

And one wonders why RBM is not taking heed of a common suggestion made by some experts in terms of managing the exchange rate. If indeed RBM is honest that it has US$700 million in forex reserves, why can’t it supply some of that to market as a way of increasing supply and stopping the depreciation?

Why is the central bank looking helpless when it has space and instruments with which it can manage the situation? Why hold on to such reserves when they cannot be used to bring order where chaos have arisen?

It is clear that the problems facing the Malawi kwacha are to do with confidence or the lack it among various players in the economy. As others have correctly said, people seem uncertain as regards the prospects of forex availability in the coming months. That means that the only measure that can be effective in slowing down the depreciation should be those to do with restoring confidence on the market. And the central bank should be able to do that by physically demonstrating on the market that it has adequate reserves.

Otherwise, the central bank currently really looks helpless and hopeless. #ThumbsDown to RBM.

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