‘KWACHA FALL MAY LEAD TO BUSINESSES FAILURE’
The fast-falling kwacha, which hit an all-time low of K520 against the dollar last week, may force some businesses to close shop, a situation that could send ripple effects across the economy, economic commentators have said.
The local unit, which has so far shed off over 20 percent since the closure of this year’s sales of tobacco, the country’s principal forex earner, has been falling due to a number of factors, including speculation and donor aid freeze, according to financial market analysts.
But apart from pushing up prices of goods and services, the latest being Friday’s raise in the prices of fuel, businesses are equally under threat with some getting deep into debt while others are about to fold up.
In a telephone interview on Thursday, Lewis Chiwalo, who is Economic Empowerment Action Group (EEAG) president, said the situation is dire and sooner or later companies may fold and possibly diversify into other businesses.
“The situation is not healthy. If you price your contract based on K400 exchange rate to the dollar and then the kwacha depreciates to K500, you certainly would incur a huge loss,” he said.
Chiwalo, who is also managing director of Multicoms Trading Company, an enterprise that imports various engineering equipment, said the situation is even serious because of the country’s size of the economy.
Candlex Limited operations and marketing director Fredrick Changaya said the depreciation of the kwacha has two major effects.
He said the fall will certainly push up prices and reduce people’s disposable incomes and, therefore, reduce demand.
“If demand falls, we will not sell and produce more and we will not enjoy economies of scale. Due to the fall of the local currency, we are also being forced to borrow at exorbitant interest rates to meet our import requirements,” said Changaya, whose company produces for the mass market.
He, however, called on the Reserve Bank of Malawi (RBM) to implement policies, including rationing forex, that would see businesses benefitting from the little forex available on the market.
Minister of Finance, Planning and Economic Development Goodall Gondwe, in an earlier interview, said rationing of forex would not be possible.
Due to factors including the fall of the local currency, RBM raised its December 2014 inflation estimates from 20.5 percent to 25.4 percent.
Last week, Consumers Association of Malawi (Cama) executive director John Kapito said the fall of the kwacha has serious implications for local Malawians, bearing in mind that the country had elections this year.
He said due to the kwacha depreciation, there will be price increases in basic goods and services and employees will be asking for higher wages.
Malawi normally faces acute foreign currency shortages during the lean period when its demand exceeds supply.
This is all very painful to watch …. Fiscal policy at
loggerheads with monetary policy at its worst! Don’t blame the kwacha
floatation for this though. Given that monetary issues are not well understood by the majority let me explain that this haphazard situation of the kwacha wobbling
from side to side has been there since the beginning in the seventies but was
being hidden or covered up by a “fixed” kwacha. Now everyone can see how amateurish
we have been as a nation in managing our fiscal and monetary policies in 50 years. The
economy is in stagnation. We have an opportunity to mobilise the nation to wake
up and face the challenge. The economy needs dynamic solutions to create wealth
for our people and time is running out.
Firstly, with a floating currency, talk of reserves is
misplaced. It is largely about balancing import bill vs export bill, simplistic
speaking. Assume the monthly export bill is $150 million then if govt self-
policed and froze large importation of luxury cars, items, travels etc so that the total
national monthly import bill matches $150 million, right now right here, the
kwacha would stabilise! This is the guiding principle that fiscal and monetary
policy must aim for in the short term. Long term the goal must be to grow that
export bill to over $200 bn so our people can enjoy life and import whatever
they want without looking over their shoulders. That can only be achieved with
industrial production investment.
Let me be a little bit technical now. The fiscal policy
impacts economic growth and inflation. Unfortunately, the govt unbalanced public
finance policy is nullifying monetary effort to combat inflation due to i) excessive
govt borrowing ii) high levels of govt debt that force RBM to intervene in the
markets to ensure proper functioning of
the financial markets and transmission mechanism. Iii) it can be argued that
the Malawi Govt excessive feasting on
capital markets is raising the cost of capital thereby discouraging private
investment (crowding out). The problems with RBM monetary policy on the other hand include i) failure to
achieve financial stability for Malawi, ii) high inflation rates due to use of
outdated inflation tools. iii) Excessively high bank rate fixed at 25% that is stopping
investment and economic growth. Best practice
around the world is about 3% with liquidity reserve requirements (LRR) below
5% instead of current 15%.
For how long are the authorities going to to keep inflicting pain on our
own people through wrong fiscal and monetary policies? For how long is this
nation going to suffer and keep hugging poverty pillows when better solutions
are staring us in the face? Please let us not miss another decade to solve Malawi
poverty woes once and for all by applying dynamic solutions that address the nation’s
idiosyncratic bottlenecks by better synchronising fiscal and monetary policies. Is that too
much to ask?
WELL THE NOSE DIVING OF THE MALAWI KWACHA WILL HIT US HAD BUT LET PROFESSOR PETER MUTHALIKA BE OPEN THAT HE HAS LITERALLY FAILED TO MANAGE THE ECONOMY CONTRARY TO HIS POLITICAL CAMPAIGN SPEECHES DURING THE MAY 2014 GENERAL ELECTIONS.”DPP YIKALOWA MBOMA MPHANVU YA KWACHA IZABWELERA KWA NTHAWI YA BINGU”. IT IS UNFORTUNATE THAT MOST POLITICIANS INCLUDING PETER MUTHALIKA TAKE ADVANTAGE OF THE ILLITERACY LEVELS OF THE MAJORITY MALAWIANS TO WIN POLITICAL POSITIONS.