Sometime in January 2013—eight months after then president Joyce Banda, Finance Minister at the time Ken Lipenga and Reserve Bank of Malawi (RBM) Governor Charles Chuka had thrown all caution to the wind and liberalised everything—time came for the trio to justify their decisions as it always happens when you implement radical change that turns out sour.
The trio was at pains to defend the free market reforms in the face of rising anger at the excruciating pain the policy changes such as the kwacha’s devaluation and flotation; cost reflective water and electricity tariffs as well as the automatic pricing mechanism of arriving at fuel prices had brought.
When, in trying to allay fears of the pain the so-called flexible exchange rate regime would bring to Malawians—especially given the steepness of the local currency’s fall at the time—Chuka’s statement, as I said at the time, was really baffling.
He said: “I know some people are predicting that the kwacha will fall to as much as K400 or K500 to the US dollar. But look, who can afford to buy US dollars at that price? I would say nobody—not even companies. So, even the forex trader would have to limit the price adjustment or else they would have nobody to buy their forex.”
At that time, I did wonder whether such a statement had really come from Malawi’s leading re-creator of the free-floating currency market and student of the Bretton Woods Accord.
Because, I argued at the time, the more relevant side of Chuka’s question should have been: Who can afford not to buy the green buck at any price?
I countered in this very column that because we do not have a choice, we will continue to seek the dollar at any price provided it continues to be in short supply.
As long as we don’t generate enough forex, I submitted, as long as we import more than we export and as long as the kwacha remains floated, we would be paying more for the dollar.
It did not take long before the kwacha went over the edge and was trading at around K525 to the dollar for months before climbing down.
Chuka had got it wrong.
During an interview with my colleague Dumbani Mzale towards the end of last year, when the kwacha had started sliding again after recovering somewhat, Chuka also said something interesting:
“It should not be news to any Malawian that the kwacha is depreciating. Who is talking about it anyway? Ask the exporters what they feel now that the kwacha is depreciating and those are the people we should worry about most. Exporters should get the right price for their dollars so that they can invest more in exports. If we continue to worry about consumers like you and me and worrying about traders who are trying to import all kinds of goods into the economy for nothing, then we are missing a point. We should be concerned about how the exporter feels whether now he has conditions to invest more, export more because now they can cut their cost and make profits. That should be the story.”
Those were the days when Chuka was a free market crusader; the days when he strongly believed that the market always corrects itself; the days when the Governor had so much faith in the integrity of the market and its players that he let them determine the exchange rate—and boy, did the banks and other authorised dealer banks love him!
But, once again, Chuka got it wrong and he has just realised his naivety now. How could he trust people who are so used to getting hefty bonuses at the end of the year that mostly come from gaming the market, especially from dubious currency trading in this case?
And so, suddenly, Chuka’s central bank is accusing the money market folks—whom he trusted and thought were the epitome of business integrity—of being greedy pirates who are speculatively attacking the kwacha to cause foreign currency shortages that are not there.
Chuka’s RBM is now accusing his hitherto cheer leaders in the financial market of exaggerating the exchange rates, creating huge spreads between the buying price and the selling price to make billions, leading to financial fragility in the local economy. Suddenly, it has dawned on the man—who unabashedly believed that banks are so responsible that he outsourced the management of the local currency to them—that these folks cannot be trusted.
Suddenly, Chuka no longer worries about the exporters he said are the only ones we should care about when it comes to exchange rate movements.
Mr Governor, have the exporters stopped shipping out the goods? With the kwacha’s recent softening, shouldn’t you be celebrating that exporters will be making a killing? Why, Mr Governor, are you suddenly restricting the exchange rate spread to avoid a slide that you said should never be news?
Suddenly, Chuka has seen the need for the common sense regulation of the exchange rate market that some of us have been demanding for years.
By declaring that the maximum margin for buying and selling of currencies relative to the kwacha will be K5—among other forex control measures he announced this week—Chuka has come full circle in his monetary policy evolution as a dose of reality hit him hard.
It’s about time he woke up too. He had been in free market fantasy land for far too long. n