Cheaper money puts pressure on forex

The Malawi Confederation of Chambers of Commerce and Industry (MCCCI) has blamed cheaper money for putting pressure on foreign exchange, arguing that the recent bank rate hike will ease the situation.

MCCCI chief executive officer Chancellor Kaferapanjira said over the weekend that, already, the kwacha has shown signs of stabilisation because of increases in interest rates occasioned by the hike in bank rate to 25 percent early this month.

“While everyone, including the industry and commerce, would want cheaper money, it was that cheaper money that kept putting a lot of pressure on the foreign currencies,” he said.

“Now that interest rate are high and, apparently, the discount window is closed, the pressure on foreign exchange to continue appreciating should subside. Inflationary pressure emanating from exchange rate depreciation should, thus, be under control.”

The Reserve Bank of Malawi (RBM) on December 3, raised the rate at which commercial banks borrow from the central bank by 400 basis points to urgently stabilise the kwacha to anchor inflation expectations owing to year-on-year money supply growth, largely triggered by private sector credit.

Data show that that private sector credit from the commercial banks, at K208.2 billion in October 2012, remained substantially high; hence, putting pressure on domestic prices and also on foreign exchange reserves and the exchange rate.

Since the kwacha was devalued by about 50 percent and subsequently floated as part of the wider economic reforms, the unit has been on a free-fall, losing a further 30 percent from the initial K250 on the devaluation day.

Last Friday, the kwacha traded at K342, K582, K481 and K43 against the dollar, pound sterling, euro and rand respectively, in authorised dealer banks.

But Kaferapanjira stressed that the lessening pressure on foreign exchange underscores the importance of staying the course on reforms, arguing that anti-reformists are promoting a ‘recipe for destruction of the economy’.

“The reforms are necessary for recovery, for what they are doing, to reverse the bad [economic] policies of the past,” he said.

Some of the reforms, among them, the flotation of the kwacha, have irked the Consumers Association of Malawi (Cama) and its membership who are calling for public demonstrations on January 17 2013.

They argued that the flotation of the currency should have been done only after certain conditions were achieved such a flexible exchange rate regime to defend the kwacha against speculative attacks and prevent its free fall.

But Kaferapanjira has argued that fixing the kwacha rate is the cause of all problems the country is passing through, observing that reversing the reforms will create further problems and prolong the recovery period.

“Every time the value of the kwacha is tampered with, for example, fixing its value against other currency of Malawi’s major trading partners has been followed by utter misery for all citizens. Reforms are always difficult to pass through, just like any change,” he said.