Africa-Press – Malawi. When a nation experiences shortages of foreign exchange, it is a challenge bigger than what many people can imagine and understand. This article looks into some causes, complications of the subject matter and solutions……
Malawi under President Lazarus Chakwera’s Tonse Alliance administration is currently facing serious shortage of foreign exchange. This problem is causing several other challenges as well on the economy.
The other challenge is that few people understand what is happening and what is likely to happen in the near future because of the same forex scarcity in the country. A lot more damage is happening to our economy and will continue to happen, thereby inflicting more pain and poverty to the majority of Malawians.
A dollar shortage occurs when a country lacks a sufficient supply of U.S. dollars (USD) to manage its international trade effectively. This happens when a country has to pay out more USD for its imports than the USD it receives from its exports.
We now take a look at key factors that influence foreign exchange rates
Interest and inflation rates. Inflation is the rate at which the cost of goods and services rises over time. Current account deficits. Government debt. Terms of trade. Economic performance. Recession. Speculation.
One of the risks associated with foreign trade is the uncertainty of future exchange rates. The relative values of the two currencies could change between the time the deal is concluded and the time payment is received.
Foreign exchange risk refers to the losses that an international financial transaction may incur due to currency fluctuations. Foreign exchange risk can also affect investors, who trade in international markets, and businesses engaged in the import/export of products or services to multiple countries.
Dangers
In general, a weaker currency makes imports more expensive, while stimulating exports by making them cheaper for overseas customers to buy. A weak or strong currency can contribute to a nation’s trade deficit or trade surplus over time.
Foreign exchange markets serve an important function in society and the global economy. They allow for currency conversions, facilitating global trade (across borders), which can include investments, the exchange of goods and services, and financial transactions.
If a country cannot acquire additional reserves and if it does not change domestic policies in a way that causes excess demand for foreign currency to cease or reverse, then the country will run out of foreign reserves and will no longer be able to maintain a credible fixed exchange rate.
Foreign exchange reserves are assets denominated in a foreign currency that are held by a nation’s central bank. These may include foreign currencies, bonds, and so on.
The country’s exporters deposit foreign currency into their local banks. They transfer the currency to the central bank. Exporters are paid by their trading partners in U.S. dollars, euros, or other currencies. The exporters exchange them for the local currency.
Higher interest rates offer lenders in an economy a higher return relative to other countries. Therefore, higher interest rates attract foreign capital and cause the exchange rate to rise.
Way forward
There are a handful of methods that can solve a currency crisis, including implementing floating exchange rates, moving away from pegged rates, monetary policy that allows for trading with the market, government policies to attract foreign investment, and the country purchasing its own currency.
Three sources of supply of foreign exchange are : Exports: Exports of goods and services is an important source of supply of foreign exchange. Grants and donations from rest of the world: A significant amount of foreign exchange flows from rich to poor countries by way of grants and donations.
Leadership
Malawi needs a leadership that has a clear vision and is seriously geared to deliver, not just mere dream and talk. The beautiful and amazing speeches being made won’t change anything. The citizens on the ground are doing their part, they are trying and working very hard. So our political leadership should get to work now and do their part and stop preaching the gospel of prosperity because Malawians have heard enough.
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