Ever since the court-ordered June 23 Fresh Presidential Election which ushered in a new administration of President Lazarus Chakwera and Vice-President Saulos Chilima under the banner of a nine-party Tonse Alliance, there have been a number of changes on both the political and economic front.
The wind of change has not spared the foreign exchange market where our beloved currency, the kwacha is facing some ‘battering’ against some of its major trading currencies, notably the dollar, British pound and South African rand.
What was first noticed on the parallel market and foreign exchange bureaus where the kwacha was seen to be losing its stability and value has now crossed over to authorised dealer banks (ADBs) deemed a very official channel for forex.
Currently, demand is exceeding supply of foreign exchange on the market; hence, the depreciation of the kwacha which at the time of writing this piece on Tuesday was selling at around K756 against the dollar. This was in contrast to the ‘stable’ kwacha-dollar rate of around K749 in the past three years.
But the kwacha’s current escapade is not new. It has been there before, especially in the run-up to an election or after. For instance, between March and May last year, in the run-up to the May 21 2019 Tripartite Elections, the kwacha lost its stability of around K740 to a dollar to around K800 for the greenback.
Exchange rate values—the price of a country’s currency in relation to the currency of another country or region—are critical and sensitive. In fact, the exchange rate is a politically sensitive variable; hence, politicians tend to attach a heavy premium to its value as they do with inflation and interest rates. These rates can be used for or against an administration.
That said, why is the kwacha depreciating this time around? This is the question many who have noted the tumbling fortunes of the local unit are asking.
There are several schools of thought. But in my assessment, I see the current developments as largely a cocktail of global and local trends. While I would agree with the Bankers Association of Malawi that the prevailing shortage of foreign exchange exerting pressure on the kwacha is due to disruptions in the global supply chain and logistics, I also feel market analysts suggesting that authorities pegged an artificial value for the local currency have a point.
I have known most financial market dealers as fine and ethical bankers not driven by greed, as it were. But then, having followed the case of one fine London banker, Tom Hayes—who was in 2016 found guilty of manipulating and fixing the London international interbank lending rate (Libor) to make quick bucks—anything is possible.
Besides, when one factors in the fact that some of the people entrusted with economic management in recent years were also embroiled in the alleged sexing up of public tax revenue figures with “loans” back in 2010-2011, the fear that the kwacha’s true value was obscured cannot be ignored.
My sources indicate that the kwacha should have been freed back in 2018 to enable it attain its true value. However, the currency’s value and some variables were suppressed as a political tool.
Following the flotation of the kwacha in May 2012, ideally, the currency should have been let to be determined by supply and demand factors. We must learn from past mistakes such as the forex crisis of 2010 to 2012 that emanated from overvaluing of the kwacha.
With the watershed election now behind, it is natural for people to hoard the dollars in anticipation of devaluation.
The current situation is worsened by the fact that remittances from Malawians living abroad have dropped largely due to the coronavirus pandemic and revenue from tobacco—the major foreign exchange earner—is projected to be the lowest this year and may not exceed the $200 million mark. Non-governmental organisations are another major source of forex, but these too have scaled down operations and most programmes are restricted to fighting Covid-19.
With the uncertainty that surrounds elections, importers too made advance orders—in most cases in excess of normal orders—for raw materials and finished goods. This frontloading is yet another factor in the equation.
Traditionally, Malawi’s forex market has been so predictable and seasonal such that the kwacha would depreciate from October to March as the country exports less, but imports more to meet the demand for agricultural inputs such as fertiliser and chemicals. The Christmas and New Year festivities also pile pressure as traders stock up for consumers.
With time, dust will settle and the kwacha should stabilise. My humble plea to those entrusted with economic management, though, is to let the kwacha attain its true value. In the short-term, such a decision will be unpopular and painful, but, at the end of the day one should endure swallowing bitter pills to get healed.