The Reserve Bank of Malawi (RBM) has defended the recent revision of guidelines for foreign exchange activities, saying they are aimed at bringing sanity in the forex market.
RBM research and policy analysis manager Kisu Simwaka said this in Blantyre last week during a public debate on taming inflation organised by the Economics Association of Malawi (Ecama).
During the meeting, one member of the audience asked the RBM on whether or not the measures announced on July 28 are not a step towards the era of controls in as far as foreign exchange business is concerned.
The observer noted that the advent of controls proved to be chaotic, arguing that taking Malawi back to the time of controls would even bring more chaos to the system.
Between 2010 and 2012, RBM introduced stringent controls in the forex market in an attempt to balance demand and supply at a time the exchange rate was overvalued.
The controls were, however, removed at the time Malawi adopted a liberalized exchange rate system in 2012 until last week when RBM directed that opening rates will be based on the previous day’s average market closing prices plus a margin of plus-minus 0.25 percent.
It further directed that intraday changes can be made provided a deal of minimum US$250,000 has been executed but must not exceed a margin of plus-minus 0.5 percent.
The central bank also directed that spreads between buying and selling exchange rates should not exceed K5 for all trading currencies at any point.
It further said in calculating Liquidity Reserve Requirement for foreign currency deposit, the balance should be converted to Malawi kwacha.
Simwaka explained that the measures are aimed at bringing in an element of discipline in the industry.
He said this is so because Malawi has an industry which is driven by profiteering.
“We have market agents that are going after making profits in the forex market and so the kwacha is subject to a lot of speculation other than the market forces of demand and supply. So the whole idea of bringing in these measures is to ensure that the exchange rate moves in-line with market fundamentals and not speculation,” said Simwaka.
He said the measures will be supplemented by occasional RBM interventions through supply of cash in the market and controlling the amount of kwacha cash.
“Surely, this is not going to create chaos because as we are talking now, we have already seen that the kwacha depreciation has slowed down and eventually we should see it stabilising,” he said.