Kwacha Losing Value despite devaluation Refusal

By Gregory Gondwe

Kwacha, Malawi’s local currency continues to lose value even in the face of strong refusal by President Bingu wa Mutharika to have it devalued.

On the other hand, the International Monetary Fund (IMF) insists that the Malawi Kwacha must be devalued to between MK230 and MK250 to the US dollar if the Malawi economy is to be rescued.

The IMF proposed rate is how a dollar is selling at the moment on Malawi’s parallel markets.

The IMF observes that at the moment Malawi is overvaluing its currency which has been pegged at MK165 to a dollar which is failing to respond to the current trends on the ground.

In his state of the nation address on Friday, February 3, 2012, when he opened the 43rd session of parliament, Mutharika was still adamant that the currency will not lose its value because devaluation has never solved economic problems of any country in the world.

“Which country has ever developed by devaluing its currency?” argued Mutharika.

“ My appeal to the International Monetary Fund is that they should give us space of three years to try to put our own economic policies but don’t choke our throats with devaluation,” he said.

He then said sometimes the IMF and other western donors have been wrong with some of their recommendations to the Malawi government.

“…They [IMF]… objected to the farm input subsidy program but it has brought food security so why not allow me try our own policies,” challenged Mutharika.

Leader of opposition in Malawi parliament John Tembo wondered why people should wait for three years to have solutions to the problems besetting the country.

“How can you tell people to wait for three years to have answers to the problems affecting them today? It doesn’t make sense at all”, argued Tembo.

An IMF report released as a result of an IMF mission to Malawi from December 1 to December 12, 2011 suggests that putting the official rate at the black market level would push the unaccounted for forex on the parallel market into the formal market.

Although Mutharika is resisting devaluation the IMF mission reached this stage after working closely with the Malawi’s ministry of Finance and Development Plan and Reserve Bank of Malawi (RBM) and other stakeholders to develop an action plan that would allow the Malawian authorities to achieve economic rescue.

“An overvalued exchange rate, in turn, has led to foreign exchange market rationing and multiple exchange rates, which remain key deterrents to private sector activity, growth, and diversification,” says the report.

Mutharika has largely blamed current forex shortages on reduced aid inflows, externalization by chain foreign stores, Satan, the opposition and an exceptionally poor tobacco market whose earnings dropped by 30 percent, in 2011.

The IMF advises that the Malawi government should allow the Kwacha to freely float and adjust to market forces than the current “artificial” situation.

Despite Mutharika’s insistence on the current ‘overvalued’ rate of the kwacha, the currency has not been kind to his wishes as over the months it has started losing ground against major currencies as observed from market rates offered by commercial banks.

Reserve Bank of Malawi public relations officer Ralph Tseka told a local daily last week that the adjustments were within a set band where the kwacha is officially allowed to fluctuate.

He said movements can be observed within the daily rates but cannot go beyond K1.

“The daily rates are what we call high frequency data and there are bound to be such movements but cannot go beyond K1,” Tseka was quoted as saying.

The Daily Times reported last week that the financial sector and business community have attributed recent movements in the kwacha rates to secret devaluation of the currency by authorities.

The kwacha closed at K166 from K163 against the US Dollar as of two weeks ago before trading at K167.40 against the US dollar and K260.30 against British pound and K21.06 against the South African rand a week later.

Late last week it jumped to K168.12 while the pound moved to K261.72 and the rand was at K21.19 against the kwacha respectively before moving to K168.36, a dollar, K263.08 a pound, and K21.21 a rand a day later.

Although the argument from Mutharika has been that once the currency is devalued the prices of basic commodities will sky-rocket beyond a common man’s reach, prices of the very commodities he is talking about have been going up silently in the last six months.

Government spokesperson Patricia Kaliati said they are aware that prices of basic commodities are going up.

She said there is no way they would try to change the status quo considering that Malawi’s economy is liberalised, a point which economic experts have bashed, arguing that if the economy were really liberalised the kwacha should have been left to float freely.

The Consumer Association of Malawi CAMA says Kaliati should not boast of a liberalized market when some laws directly affecting consumers are not observed.

CAMA’s Executive director John Kapito told Gregory Gondwe Blog that government is failing to establish a consumer council that would safeguard unnecessary price hikes of goods on the country’s market.

“It is expected of government through the ministry of trade and industry to establish a consumer council that would be working towards safeguarding market prices as well as unnecessary price hikes of consumables,” said Kapito.

This is stipulated within the consumer protection act that was passed in 2003.

Up to date, the council’s existence remains a pipe dream, a development that gives room to unscrupulous traders to adjust prices of goods as they wish.

CAMA blames it all, on government, for failure to implement this piece of legislation, which observes that this has negatively impacted on ordinary Malawians.

However, principal secretary in the ministry of trade and industry Nebat Nyirenda said his ministry has already started establishing a consumer council secretariat and that people will soon be recruited.

Nyirenda said the board for the consumer council has already been established in accordance with the law and that it comprises of members from the private sector, ex-officio members from government and a representative from the chamber.

Economics Association of Malawi (ECAMA) has urged government to come-up with reasonable devaluation of the kwacha in line with IMF suggestions in order to allow for the donor inflows which remain suspended.

“Devaluation will certainly be inflationary but its stabilising peak is sooner than in a speculative environment. Devaluation will unlock the IMF programme, a prerequisite condition for most donor support inflows,” said ECAMA vice president Edward Chilima in an interview with a local daily.

He said once the IMF programme is in place, the country will minimise in adequate forex reserves as well as the challenges with fuel availability, which is another significant cause of recent commodity price increases.

He said the current situation has increased speculation and panic.

Mutharika has however argued: “While the villagers will be suffering, the economists will have options for survival but not the villagers who have no jobs and any source of income.”

Mutharika described the local economists, whom he said are being influenced by IMF, as ‘brainwashed by colonialists.’

One precondition for the resumption of budgetary support by Malawi’s donors under the Common Approach to Budget Support (CABS) is that Malawi revives its International Monetary Fund (IMF) program.


2 thoughts on “Kwacha Losing Value despite devaluation Refusal

  1. Although bingu has failed to run the country, but on this issue’ I agree with u mr president, this ll really affect unemployed people, & I don’t see any advantage of IMF’s idea, to those who r working’ their salaries might go up may be with 20%, & the prices of the food & everything might go up with same percentage which is the same! I hate DPP for their mismanagement’ but on this issue, opposition & ruling’ please be together & fight against IMF’s suggestion, if they want to help us’ let them help us not through devaluation, it doesn’t make sense at all, they want to make it like ZIM dollar, why they always keep their currency strong????????????.


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