Reserve Bank of Malawi (RBM) Governor Wilson Banda says the central bank will not maintain a fixed exchange rate regime, but will allow flexibility in the movement of the local currency going forward.
The Democratic Progressive Party (DPP) admnistration had “silently” adopted a fixed exchange rate regime as the kwacha dollar exchange rate remained firm at K740 for over three years since 2016.
This was despite the country adopting a floated exchange rate regime in May 2012, which in essence entails that the kwacha’s value should be dictated by the forces of demand and supply of foreign currency on the market.
In an interview on Friday on what will be the exchange rate policy to be championed by the Tonse Alliance administration, Banda said the central bank will not allow the local unit to be fixed against other international convertibles.
He said: “The exchange rate depreciated from July this year if you noted and it is going to continue to respond to economic fundamentals.
“If pressure on balance of payment persists, if our foreign currency remains thin on the ground and if demand shoots through the roof, obviously exchange rate has to give way.”
Speaking on the sidelines of the 2020 Economics Association of Malawi (Ecama) Annual Lakeshore Conference in Mangochi on Friday, Banda said RBM is also mindful of the fact that a runaway exchange rate is not ideal for the country as it brings many harmful effects.
He said the bank is cautiously monitoring what is happening with the exchange rate in the region, especially in Zimbabwe, South Africa and Tanzania.
Said Banda: “During the last Monetary Policy Committee meeting, we considered all the elements and we took a decision to adjust the policy rate downwards to 12 percent from 13.5 percent. But we were very cautious to ensure that we don’t allow it all.
“So, we maintained LRR [Liquidity Reserve Requirement] on both domestic and foreign to ensure that we don’t loosen up monetary policy. The basic idea behind bringing down the policy rate was to spark growth into the economy, inject the liquidity and stimulate economic development.”
While describing local banks as being strong, well-capitalised and resilient at the moment, the governor said the basic idea of letting a flexible exchange rate is to absorb external shocks, adding that RBM has also taken measures to ensure that interest rates are responsive to what is happening on the ground.
During the meeting, Vice-President Saulosi Chilima unveiled a five-point plan which government believes could rejuvenate the economy in the face of Covid-19 pandemic.
The plan includes resolving infrastructure deficits ‘within a shortest time period possible,’clearing private sector arrears, arresting growth in public debt stock, eliminating fiscal pressures arising from State-owned enterprises (SOEs), and broadening the tax-base by formalising the informal sector.