Real test awaits our beloved kwacha
There is excitement regarding the firming of the local currency, the Malawi kwacha, with respect to its trading value against other foreign reference currencies, most notably the dollar.
President Joyce Banda and some Cabinet ministers as well as ruling People’s Party (PP) officials have, all of a sudden, started giving updates on how the kwacha is faring against the dollar at every possible opportunity. With such updates, surely, one does not need to check the exchange rates in newspapers or authorised dealer banks (ADBs) websites.
How I wish such updates were as handy as they are now when the kwacha was being battered after its 49 percent devaluation and its subsequent floatation in May 2012.
I am writing this on a Monday when NBS Bank, for example, was buying the dollar at K350 and selling the same at K378. This is encouraging, especially considering the background we are coming from when the kwacha traded at K420 to the dollar just a few weeks ago.
Why is the kwacha gaining in strength against the dollar and other main trading currencies? Is this a sustainable run? What should be done to consolidate the gains?
Personally, I am not as excited or surprised with the current behaviour of the kwacha. This was expected at this time of the year when the tobacco marketing season is in progress. Tobacco remains the country’s major foreign exchange earner, accounting for about 60 percent of export earnings.
Thus, there is weak demand for foreign exchange around this time of the year; hence, our one and only beloved kwacha can afford to show some signs of stabilisation as is currently the case. Besides, as National Bank of Malawi said in its April 2013 Economic Newsletter, having almost cleared external arrears which had accumulated in the previous three years, the weak demand is also as a direct consequence of an effective monetary policy implementation strategy by the Reserve Bank of Malawi. This, notwithstanding the weak fiscal performance.
Besides the tobacco dollars, nearly all cash crops are up for sale at this time of the year; therefore, the economy is earning some handsome dollars from tea, coffee, among others. There are also dollars trickling in from development partners as well as financiers of several non-governmental organisations (NGOs).
Despite these realities on the ground, some overzealous commentators are attributing the stabilisation of the kwacha to “fruits” of the Joyce Banda administration’s Economic Recovery Plan (ERP).
I refuse to dance to the tune that the stabilisation is a result of the ERP. Before we start celebrating, let us wait and see how our currency will behave during the peak demand period for foreign exchange in September when, for example, we start importing fertiliser and other needs for the new agriculture season. That is when the kwacha will face its real test!
Otherwise, this time of the year there is always low demand for forex; hence, the kwacha has always ‘behaved’.
Suffice to say, though, that the stabilisation of the kwacha has brought some direct benefits such as the recent reduction in prices of fuel at the pump. Of course, as is always the case when prices come down, there was perceived reluctance from dealers who waited over 24 hours before effecting the new prices. Ironically, when prices move up, there is always an instant hike and the so-called “poor communication” does not arise.
By the way, why is it that based on the same variable of the stabilising kwacha exchange rate and easing inflation rate, electricity tariffs have gone up by 30 percent whereas fuel pump prices have gone down? Why the double standards? Or, are we dancing to some music from some development partners?
To sustain the kwacha exchange rate stability, we still need to do more. It is a fact that our economy currently has a very narrow export base, yet requires more foreign exchange to meet the import bill of the more imports we need.
It is, therefore, important that we move forward by walking the talk on value-addition to our predominantly ‘raw’ or ‘semi-processed’ agricultural exports. Today, we also talk about minerals such as uranium in Karonga. The economy should work to reap more forex from such ventures. That is one of the surest ways to have a more stable kwacha all year round than the prevailing seasonal gains.
And whereas monetary policy has managed to get us this far, in its own right it is not enough to sustain the exchange rate and contain inflation rate. There is need for government, especially in this election year and the forthcoming election budget, to cut its cloth according to its size. This should be demonstrated through expenditure cuts and curbing the borrowing appetite to support the current monetary policy.
