Financial Market Dealers Association of Malawi (Fimda) has warned that unless underlying demand and supply challenges in the forex market are addressed, attempts to improve forex mismatches including devaluation on the kwacha will not yield any results.
Fimda president Leslie Fatch said this in view of the widening misalignments in the foreign exchange market, a year after the Reserve Bank of Malawi (RBM) devalued the kwacha by 25 percent to close the mismatch in the market.
Warns on free-floating currency: Fatch
Presently, the kwacha is trading at an average of K1 550 in authorised dealer banks (ADBs) against K1 036 daily foreign exchange bureau rates published by the RBM, creating a spread of about K514 or 49 percent.
Fatch, in a written response on Tuesday, observed that the fact that demand continues to outweigh supply in the market, continued pressure on the currency in the interim and a wide gap in the forex market are inevitable.
He said: “There were and continue to be calls from different economic and financial agents against the devaluation citing the fact that it does not address the underlying causes for the forex mismatch.
“Unless these factors are addressed, we will continue to address the symptoms and not underlying ailments to our economy and devaluation will not be a solution to closing the gap since the equilibrium may not be met through devaluation.”
Fatch while indicating that the best alternative to the forex challenges would have been to let the currency float said the current state of the economy leans towards demand with minimal supply as such this would create even bigger problems.
“A free-floating currency may lead to a huge currency depreciation which will in the end be detrimental as it will end up being inflationary owing to the nature of the Malawian economy and in the end affect consumers’ livelihood.
“Instead, the use of monetary policy to suppress aggregate demand, a thing which the central bank is already undertaking as evidenced through the recent upward revision of the policy rate could help though the impact of this is not immediate as such measures have a lag so we cannot see the results immediately,” he said.
Weighing in, economic statistician Alick Nyasulu also observed that devaluation will not be a solution to forex challenges saying forex generation largely hinges on the country’s ability to export.
He said: “Until we address the export side of goods and earn foreign exchange, devaluations are a futile exercise.
We should focus our energy on how we can increase our exports by adding value and reducing production costs. Current exchange control measures are merely fire-fighting solutions that do not address fundamentals of forex imbalances.”
RBM devaluated the kwacha on May 27 2022 in a move which was meant to align forex supply to macroeconomic fundamentals and ensure supply in the formal market.
Then, imbalances between supply and demand had been prevalent on the domestic foreign exchange market evidenced by low foreign exchange supply, declining official foreign reserves and widening spread of rates on the market.
Presently, total foreign exchange reserves dropped to $592.1 million or 2.4 months of import cover as at end March from $646 million an equivalent of2.6 months.
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