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Reserve Bank of Malawi says no to devaluation

Blames speculation for mounting pressure on kwacha

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The Reserve Bank of Malawi (RBM) has expressed worry over persistent speculations and uninformed opinion about the future direction of the exchange rate.

There has been speculation of another devaluation in recent weeks following the 25 percent devaluation effected on May 27 2022

In a statement on Tuesday evening RBM Governor Wilson Banda said the development is exerting unnecessary pressure on the exchange rate

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Banda said the speculation is leading to market participants taking a wait and see approach to foreign exchange transactions, which is compounding the situation further.

“The RBM, therefore, wishes to inform the general public that it has no intention to devalue the kwacha further in response to these speculations.

“We would like to further inform the general public that there are measures that government is undertaking to address foreign exchange supply-demand imbalances,” Banda said.

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The RBM Governor said some of the measures authorities are putting in place include the revision of the Exchange Control Act to among others, introduce measures to curb illegal externalisation of foreign exchange.

He said the authorities are also promoting the diversification of exports towards the mining sector such as gold, gem stones and rare earth.

“Establishment of mega farms to enhance agriculture commercialisation efforts, targeting high value export crops.

“Establishment of structured markets for export crops such as legumes to enhance formal trade and increase receipts through formal channels; and creation of a testing lab to improve export value,” Banda said.

He added that going forward; the central bank will continue to allow the exchange rate to respond to market fundamentals by maintaining a flexible exchange rate regime.

Commenting on the development, Financial Market Dealers Association President Maclewen Sikwese agreed with the RBM chief that the speculation on potential future devaluation is far more dangerous to the value of the Malawi kwacha than the actual foreign exchange demand and supply imbalances in the country.

Sikwese said the speculation has a high potential of causing panic amongst both the buyers and sellers of foreign exchange; increasing demand for foreign exchange whilst restricting supply by encouraging hoarding by foreign exchange holders.

According to Sikwese, speculation might create its own momentum outside fundamentals and put the kwacha under extreme pressure to depreciate beyond a market clearing level.

“As regards to the measures on ensuring the improved foreign exchange supply in the formal market, you will notice that most but one are medium term measures and their impact of supply of foreign exchange might not be realised in the near term.

“However, in the short term it is very important to ensure the little forex we are able to generate is not lost through illegal externalisation and hoarding and that these flows pass through the easily tracked formal financial markets,” Sikwese said.

He observed that key will be the enforcement of the measures to curb the illegal externalisation of foreign exchange once the revisions to the exchange control act are done.

“More critical is the continued engagement of the central bank with the public, to help manage the level of speculation on the Malawi kwacha to help plug in the information gap that is there,” Sikwese said.

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