New Malawi Reserve Bank Governor Charles Chuka on Monday admitted the weakening of the kwacha against the US dollar is a big sacrifice to all Malawians.
Chuka said the impact of the 49 percent devaluation from K168 to K250 against the dollar could be very huge.
The Reserve Bank of Malawi (RBM) on Monday announced the much-anticipated devaluation of the kwacha and declared the countryâ€™s adoption of a free-floating foreign exchange regime.
“It is a big sacrifice to every household in the country… Its impact is going to be huge, but we had to do it,” said Chuka flanked by two of his three deputies, Dr. Naomi Ngwira and Dr. Grant Kabango, during a news conference in Lilongwe.
Ben Kaluwa, professor of economics at Chancellor College, a University of Malawi (Unima) constituent college, said prices of most goods will go up in the wake of the devaluation.
But, Kaluwa said: “Prices will not go up as much because the kwacha had been trading at about K300 to a dollar on the parallel market and prices of most goods already captured that as of now.”
He said in the near future, the floating of the local currency would mean more investors bringing their dollars into the country.
Consumers Association of Malawi (Cama) executive director John Kapito said the devaluation was expected and “much-talked about”, saying in real terms, the kwacha was already devalued, but just lacked the actual figure.
Said Kapito: “The key question to the central bank is that are we going to find the dollars in our banks now? If not, then this devaluation will hurt most Malawians.â€
Some analysts said while the devaluation may be good news to most exporters who will relatively earn higher margins on a unit of their exports than before the currency adjustment, the decision will lead to job losses in the short-term because government does not have enough foreign reserves to clear outstanding debts with its suppliers.
The foreign reserve position is at one month cover, far less than the World Bank recommended minimum of three months position.
Said Chuka: “Admittedly, the devaluation should have awaited the clearance of external payments arrears to avoid adverse impacts on the corporate sector. However, this was not possible as efforts to source foreign exchange for the purpose were not successful.â€
The weakening of a currency also means imports will become expensive and, therefore, an immediate hike of prices of basic goods and services is expected.
But Chuka agreed with Kalua that the impact of the devaluation on general prices is anticipated to be muted because most prices already reflected the parallel market rate at which most suppliers have been sourcing foreign exchange for quite a while.
He also stressed that the devaluation of the kwacha and the liberalisation of the foreign exchange market are expected to contribute to governmentâ€™s efforts to reach an early agreement with the International Monetary Fund (IMF).
Chuka further announced that all dollars earned at the tobacco auction floors will now be transferred to the sellerâ€™s commercial banksÂ and not to the central bank as was the case earlier.
Malawi Economic Justice Network (Mejn) executive director Dalitso Kubalasa said: “This [devaluation] has been very long overdue. We need to accept it other than delaying the post-suffering. Of course, effects will be very biting, but it is good we have made a decision rather than delaying.”
Malawi Congress Party (MCP) president John Tembo, who is leader of opposition in Parliament and was the first Malawian to serve as RBM governor, said he has long advocated for the floating of the kwacha as the best option.
Said Tembo: “The reasons and factors behind the devaluation are justified. What is the alternative if we donâ€™t devalue? I cannot be happy about devaluation, but factors and options available justify this.”
Meanwhile, barely hours after the official announcement of the devaluation, Game Stores at Chichiri Shopping Centre in Blantyre and Chipiku at Ginnery Corner closed for business. This development raised speculation among consumers that the shops were pegging new prices on their goods.
However, Shoprite at Chichiri Shopping Centre remained open, but it was flooded with people, a sign of panic-buying of assorted items whose prices are likely to shoot up. The same was the case in Lilongwe when some local entrepreneurs and ordinary buyers rushed to re-stock in anticipation of price increases.
Many people flocked to Chipiku Shop along the Chilambula Road in the capital to buy their last cheap groceries after the devaluation.Â Some said they bought more than they needed for fear of waking up today to find commodity prices have gone up.
Moses Yohane of Area 36 was one of those who rushed to re-stock his groceries.
Said Yohane: â€œThis is for home use because of the devaluation. I thought of shopping today before prices go up. At Chipiku, sugar was being sold at K220 per kilogramme and after devaluation of 50 percent the sugar is selling at K250 per kilogramme.â€
Game and Chipiku officials were not available for comment when The Nation wanted to know if the Blantyre closure and the Lilongwe sugar price increase was a response to the devaluation.-(With additional reporting by FRANK NAMANGALE and AMOS GUMULIRA,