Centre faults world Bank on kwacha

The World Bank and the Centre for Research and Consultancy have differed on the flexibility of the kwacha.

The economic think-tank has faulted the Bretton Woods institution for advancing economic decisions and opinions that are not supported by evidence on the ground.

In its 11th edition of the Malawi Economic Monitor (MEM), the World Bank noted that there is limited exchange rate flexibility of the local currency against the dollar now for over three years.

The bank argued that such a situation over the period has only increased the real appreciation of the exchange rate and reducing the country’s competitiveness on the global market.

Reads the bank’s report: “Some measures of exchange rate flexibility could offset these concerns and help preserve foreign exchange reserves for periodic shocks and avoid disruptive macro-economic imbalances.

“In addition, sustaining a prudent monetary policy will be key to maintaining lower inflation.”

The World Bank said despite the Reserve Bank of Malawi (RBM) reporting official gross reserves of $624.5 million (about K462 billion) or three months of import cover in May, the private sector has reported increasing queues for foreign exchange.

The International Monetary Fund Rapid Credit Facility approved on May 1 2020, helped  to increase reserve buffer by $91 million (about K68 billion).

Reflecting on other currencies in the region, World Bank also said that many other regional currencies—including those of South Africa, Zambia and Mozambique—have depreciated considerably since the onset of the Coronavirus crisis, thereby increasing the nominal effective appreciation of the kwacha.

Figures show that although telegraphic transfer (TT) kwacha rates have remained stable against the dollar, cash rates have increased.

Through July 20, the kwacha/dollar exchange rate has depreciated by 0.2 percent since the beginning of the [Covid-19] crisis.

Reads the report: “Although the TT rate has remained stable, foreign exchange bureau cash rates have increased considerably since January, so that the spread between FXB and TT rates have increased to their highest levels in recent years.”

But in an interview on Tuesday, Milwas Tobias, Centre for Research and Consultancy executive director differed with the World Bank thinking, stressing that economic decisions must be informed by evidence “rather than opinions”.

He said it was imperative for the country to fix her low productivity problem first, adding that recent surveys do not cite exchange rate policy as the key challenge to the private sector.

Said Tobias: “The guiding principle to exchange rate policy choice is the monetary policy objective, which is derived from broad economic objective.

“The issue of reduced competitiveness assumes that the economy is producing goods and services which are comparably expensive on global market. It is difficult to believe this assumption.”

He said productivity is low and that is what “we must fix first otherwise we have had advice from institutions [such as the World Bank] for as long as we have been politically independent yet we are still poor”.

Tobias cited the Business Climate Survey reports produced by the Malawi Confederation of Chambers of Commerce and Industry, which he said does not allude to exchange rate policy as among challenges affecting the private sector.

He said: “So, perhaps the problem of less competitiveness is elsewhere and may be inefficient transport system, high cost of finance and unreliable energy supply, among others.

“For a net importing economy, a status which we must change, weak local currency can be inflationary.”

Currency appreciation usually reduces inflation because imports become cheaper and the lower prices lead to lower inflation.

However, on one hand, it makes imports more attractive, causing the demand for local products to fall, thereby widening the gap between imports and exports or trade gap.

RBM spokesperson Onelie Nkuna had not responded to our questionnaire as we went to bed.

We wanted to seek the central bank’s position on the matter.

The local currency experienced some volatility in mid-2019 but stabilised in the second half. The currency depreciated by about six percent relative to the dollar in the second quarter of 2019, but regained most of its ground by mid-August 2019.

The currency has remained fairly stable thereafter. By December 2019, the kwacha had depreciated by only 0.7 percent year-on-year and the volatility was attributed to limited foreign exchange earnings, importers frontloading orders ahead of elections, and slow disbursement of donor projects.