The widespread strikes to demand high salaries by workers in different sectors of the economy were expected. The depreciation of the kwacha has triggered an increase in price of items and services. Virtually everything has gone up; from transport fares to essential commodities such as school fees. This has left the workers with very little disposable incomes. They are justifiable to demand more pay to make ends meet.
This is the price a country pays for a weak currency. The instability of the kwacha has created economic problems for the business community and consumers. It is an established fact that the stability of the kwacha is tied to the tobacco season. The kwacha stabilises during the tobacco period, but weakens, sometimes considerably, when the auction floors are closed. This cycle has been going on for many years even with door inflows. No one should blame donors for the lack of foreign exchange. It is no longer strange, but expected.
However, the problem has been the inability of our policy-makers to break the cycle. When you hear statements they make on the weakening of the kwacha, you get the impression that there is no other solution to stabilise the kwacha other than finding foreign exchange to inject into the financial system. Fair enough. But have the policy makers considered the role of the speculators in the whole foreign exchanges saga? Foreign exchange players hold the country at ransom by deliberately holding the foreign exchange during the lean period. The Reserve Bank of Malawi (RBM) has access to all Foreign Exchange Denominated Accounts (FCDA) holders including other Authorized Dealer Banks (ADBs). The Reserve Bank knows exactly how much foreign exchange is available in the country.
However, RBM has glossed over the behaviour of speculators who deliberately create a shortage during the lean period to make a ‘killing’. The central bank has never spoken against this malpractice and needs to deal decisively with the issue. When Perks Ligoya was RBM governor, he noted the problem and spoke against it.
Speculators have been a real problem in creating an artificial shortage of foreign exchange, a development that has impacted negatively on the economy and ordinary people.
They know the foreign exchange cycle and behave accordingly. Since everyone has been conditioned that foreign exchange is scarce after the tobacco season, big players in the foreign exchange market stop selling forex to create a shortage so they can sell at a high rate. It is the battle of the mind!
Can government or RBM explain to the nation why forex should be scarce in November when the auction floors close in October? And why has foreign exchange been readily available after the kwacha has depreciated? Speculators were keeping forex and only started selling it after the kwacha traded at K520 to a dollar. Suddenly, forex is available. Where has it come from? It is coming from within the financial system.
Big companies in Malawi have huge forex which they sell as and when the rate is favourable to them. The central bank takes credit for the gaining value of the kwacha to the monetary policy. This should be taken with a pinch of salt because not the whole truth is being told.
RBM needs to deal with speculators decisively. They should be using moral suasion to reason with big foreign exchange players to sell it and not rush to adjust the repo rate to make borrowing expensive and reduce consumption. This should not be a solution to the shortage of foreign exchange because it pushes interest rates up which in turn drives inflation and worsens living conditions of people.
Although the kwacha has stabilised, the damage to the economy has already been done. Inflation has soared. And when you think of lowly-paid employees, the unemployed, pensioners and ordinary people, life is just horrible. Even if the kwacha was to appreciate further, the business community will not pass on the benefits to consumers by reducing the price of goods and services.
It is important for the central bank to be working on multiple measures to stabilise the kwacha. Malawi needs a stable and not weak currency. Unfortunately, RBM is a rigid institution that does not make decisions in the interest of Malawians, but big businesses and those with vested interests. This is where the bank has failed Malawians over the years.