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Malawi Central Bank powerless on managing kwacha

As the countdown to a 21 day ultimatum to the government by the country’s consumers continues, the Reserve Bank of Malawi (RBM) says it will not respond to calls by the Consumers Association of Malawi (Cama) to manage the kwacha, saying the choice of an exchange rate regime rests with the government.

This is despite emphasis from the current administration that the central bank is the custodian of monetary policy issues with Treasury being in charge of fiscal policy.

In its petition presented to government last week, Cama called for the adoption of a managed exchange rate regime and abandon the current free-floating one which has seen the kwacha plunging from K168 in May 2012 to around K362 against the US dollar.

But in an interview yesterday, RBM spokesperson Ralph Tseka said much as there is a call from sections of the public to abandon the free-floating exchange rate regime it is up to government to decide on the matter.

“Let me emphasize here that the choice of an exchange rate regime rests with the government. Cama presented a petition to government advocating of the exchange rate regime change and it is government which can respond to that. RBM is an implementer in this case,” Tseka said.

The development has raised some question marks on the independence of the central bank as it has to rely on direction from the executive arm of the government for operations.

Cama Executive Director John Kapito said an economy such as Malawi which has no foreign exchange reserves to support its currency cannot afford a free-floating exchange rate regime.

“We are not asking the government to fix the kwacha. We just want them to start managing it instead of leaving it completely to market forces.

“An economy like Malawi’s which has no reserves to support its currency cannot afford a free-floating currency because doing so subjects it to speculation from greedy traders who deliberately withhold forex to make a killing out of increasing exchange rates,” said Kapito.

On the other hand Indigenous Business Association of Malawi said the country should count out the local industry this year if the kwacha is let loose to float as it now highly impossible for business to plan and budget.

Chancellor College Associate Professor of Economics Ronald Mangani recently questioned the rational of the monetary authorities to float the kwacha without having enough reserves, arguing the reform reflect very poor policy sequencing.

Mangani argued that the IMF definition of a flexible exchange rate system recognises the need for the authorities to intervene in order to prevent a free fall in the value of domestic currency relative to foreign exchange.

“This requires that a country should adopt such a regime only if it has enough reserves to facilitate such intervention. The adequacy of reserves is a necessary [and, I contend, even a sufficient] condition for currency floatation.

“Malawi should have started by addressing the problem of a perpetually precarious foreign reserve position before adopting a flexible regime. It is strange that we continue to believe that we can manage a flexible exchange rate system when even the IMF predicts that foreign reserves will not exceed an average of 1.2 months of import cover even by 2013.

The petition by Cama gives government a 21-day ultimatum to respond but Minister of Information Moses Kunkuyu said the presentation of the petition initiated dialogue with consumers.

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