Reserve Bank of Malawi (RBM) on Friday justified the devaluation of the kwacha by 25 percent, saying it was a necessary step to align the foreign exchange supply to the macroeconomic fundamentals as well as ensure supply in the formal market.
At a media briefing in Blantyre, RBM governor Wilson Banda said the country should look at the issue with a positive mind, assuring that the forex shortages will be dealt with.
“For those doing business, they will certainly see an improvement in supply. We hope to see a shift in the resources that were operating outside the formal system coming back into the market.
“As we increase the supply, this will have an effect of bringing down the rates, obviously because supply would have increased,” he said.
While admitting that there might be some volatilities in line with the move, Banda said he and the RBM are committed to prudent monetary and fiscal policies to contain all inflationary pressures within manageable limits.
“In the initial stages, there may be volatility, but going forward, there will be a stable transition and; therefore, benefit every Malawian as we are now going to have fuel, medicine and other crucial essentials available in the country,” he said.
The central bank’s decision to devalue the kwacha comes in the middle of negotiations between the International Monetary Fund (IMF) and the Malawi Government for a fresh economic programme called the Extended Credit Facility (ECF).
To secure the facility, government has to agree to adjust its economic policies, which include monetary policies such as the exchange rate, to deal with economic problems.
But Banda was quick to mention that the decision was not influenced by the IMF, saying the bank could have still devalued the kwacha.
Economists Association of Malawi executive director Frank Chikuta has since observed that in view of the economic crisis we are in, policy adjustment was inevitable to bring back economic stability and conditions for growth.
On his part, Malawi Confederation of Chambers of Commerce and Industry president Lekani Katandula said businesses are hopeful to see an improvement in forex supply, observing that the move has been long overdue.
“We have been in a dire forex situation, hence such a move is positive for us businesses as we will now be able to access forex at banks without challenges,” he said.
He said, going forward, the central bank should consider not fixing the exchange rate for a longer time as the idea certainly comes at a cost as is the case now.
But Consumers Association of Malawi executive director John Kapito has described the devaluation of the local currency as the final nail in the coffin.
He said: “Considering that there is nothing to export and we have to weaken our kwacha by 25 percent, this is a huge concern for us all. We are currently experiencing the highest cost of living and for our currency to be weakened by 25 percent is truly a major blow on consumers.”
During a similar period 10 years ago, the Joyce Banda administration devalued the kwacha by 49 percent, also at the height of forex shortages, fuel shortage, donor aid freeze and rising prices.