Chamber calls for Kwacha devaluation

Chamber calls for Kwacha devaluation

Malawi Confederation of Chambers of Commerce and Industry (MCCCI) has called for devaluation or re-alignment of the kwacha, but only if there is guaranteed inflows of foreign exchange and provision of safety nets to cushion the poor

In a statement, MCCCI observed that adjusting the exchange rate in the absence of back-up foreign exchange may lead to the unofficial exchange  rate moving even further, thereby creating a moving target.

Kwacha has been losing ground to the dollar

The chamber said re-aligning the kwacha in the absence of safety nets for people who live on the economic margins of society could lead to unpopularity of such a monetary policy as a result of the suffering of the people.

Reads the statement in part: “In light of these pressing concerns, MCCCI strongly advocates a prompt and comprehensive review of foreign exchange management when the country accesses foreign exchange, for example.

“MCCCI believes the prevailing spread signals an overvaluation of the local currency.”

MCCCI said it is not oblivious of the fact that the economy is consuming an estimated $250 million (about K295 billion) per month or $3 billion (about K3.5 trillion) per year of imports while on the flipside, the country’s annual revenues from tobacco, touted as the country’s major foreign exchange earner, have in the recent past averaged less than $200 million (about K236 billion).

Reserve Bank of Malawi (RBM) data shows that the official forex reserves for August 2023 decreased to $239.56 million (about K282 billion) or 0.96 months’ of import cover, much lower than the recommended adequacy level of 3.9 months of import cover for a credit-constrained economy.

On the other hand, fuelled by the scarcity of forex on the official market, the spread between the official rate and the parallel market is now hovering at about K700.

RBM has been implementing various measures to rebuild foreign reserves, including the devaluation of the kwacha by 25 percent in May last year which has had limited impact to support the build-up of official reserves.

On the other hand, RBM introduced foreign exchange auctions in January this year to facilitate the price discovery of the kwacha and address the growing exchange rate misalignment and since then, the central bank has held three auction and the kwacha has depreciated by about 13.1 percent.

Speaking in an interview yesterday, Financial Market Dealers Association of Malawi president Leslie Fatch said the sentiments from economists suggest the real exchange rate seems to be over-valued, calling for a reaction from the authorities to ensure the exchange rate is responsive to market forces.

“The fact that we are discussing devaluation means the currency is not able to respond to demand and supply forces and find its own equilibrium when there is pressure on either end,” he said.

RBM director of financial markets Chakudza Linje said at the Fourth Monetary Policy Technical Forum that the central bank is reviewing of the foreign exchange auction markets to see its impact.

She said: “Even so, we are looking at how we can inform the market in as far as the exchange rate policy is concerned going forward without much disruption.”

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