United Kingdom’s (UK) Foreign, Commonwealth Development Office (FCDO) Deputy Economist Nick Lea has said the overvalued exchange rate is acting as a tax on exporters, leading to lack of competitiveness and informalisation of exports and imports.
Lea, who was in the country last week when he had engagements with private sector officials, Malawi Government officials and development partners, said the overvalued currency greatly limits crucial forex inflows and, therefore, growth, jobs and revenue creation.
Lea’s comment comes at a time there remains a huge difference in the value of the Kwacha between the formal and parallel markets.
While the Kwacha is trading at K1,180 to the dollar on the formal market, the dollar is fetching K1,900 on the parallel market.
“All other imports are priced at the parallel rate. Everyone will, of course, feel higher fuel and transport prices, but by the government spending less on essentially ‘subsidising’ fuel — including for regional transporters — this will free up some funds to protect the rural poorest, including through cash transfers, which the UK has and will continue to support.
“Meanwhile, more predictable availability of inputs – whether machinery, fertiliser or seed – will benefit large and small firms and farmers,” Lea said.
Briefing reporters in Lilongwe recently, RBM Governor Wilson Banda said the monetary authorities have taken gradual steps in realigning the exchange rate through the use of foreign exchange auctions as a price discovery mechanism.
Banda has blamed the continued pressure on the local currency to speculation.
He said the pressure in the market is not supported by economic fundamentals.
In an interview on the sidelines of the 2023 Financial Market Dealers Association Annual Conference, National Planning Commission Director General Thomas Munthali said the forex auctions by the monetary authorities could fuel speculation.
“The challenge with the way the currency is at the moment is that there is a big discrepancy between what is obtainable on the parallel market and the formal market. Matter of fact; there should not be two currencies. There should be one formal market rate.
“How you take speculation off is by making sure that you are not going to think, ‘there will be devaluation tomorrow and that because there is going to be an auctioning of forex tomorrow, we can’t put it at that price’. Let it go. Because if you let it go, it means the market will determine that price,” Munthali said.
He was quick to note that the short-term ramifications could be huge as inflation could shoot up but that the benefits to be accrued over time would outweigh the short-term losses encountered.