Study recommends exchange rate rejig

Africa-Press – Malawi. Malawi has been urged to adopt a uni­fied, mar­ket determ­ined exchange rate to improve access to for­eign cur­rency and restore trans­par­ency in the eco­nomy.

This is con­tained in a study titled “Does Malawi’s Exchange Rate Regime Keep Prices Low?” which indic­ates that align­ing the offi­cial exchange rate with the par­al­lel mar­ket would have only a mod­est impact on prices.

Pro­duced by the Inter­na­tional Food Policy Research Insti­tute (Ifpri) in col­lab­or­a­tion with the National Plan­ning Com­mis­sion (NPC), the report says fears of run­away infla­tion may be over­stated, as pro­jec­ted con­sumer prices would increase by about 5.3 per­cent, while food prices would rise by only 2.3 per­cent fol­low­ing exchange rate uni­fic­a­tion.

“Malawi has already endured much of the infla­tion­ary adjust­ment that would ordin­ar­ily accom­pany exchange rate reform, as most imports are already priced using the informal exchange rate,” reads the policy note in part. The study argues that the cur­rent dual exchange rate regime, where the offi­cial rate is sig­ni­fic­antly lower than the par­al­lel mar­ket rate, has lost its rel­ev­ance, as busi­nesses rely on par­al­lel mar­kets for for­eign cur­rency exchange.

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Accord­ing to the ana­lysis, even an adjust­ment of the exchange rate from about K1,750 to K4,400 per dol­lar would not trans­late into pro­por­tion­ate price increases.

Pro­duced by Fre­d­er­ick Changaya, Andrew Com­stock, Joachim De Weerdt, Jan Duch­oslav, Andrew Jamali, Frank Kamanga, Grace Kumchulesi and Karl Pauw, the study, however, recom­mends effect­ive exe­cu­tion of a coher­ent set of com­ple­ment­ary reforms includ­ing strength­en­ing fiscal dis­cip­line, main­tain­ing a tight and cred­ible mon­et­ary policy stance, boost­ing export diver­si­fic­a­tion and pro­ductiv­ity among oth­ers.

The World Bank has con­sist­ently advised the Malawian gov­ern­ment to adopt a flex­ible exchange rate mech­an­ism to min­im­ise the spread between the offi­cial exchange rate and the par­al­lel mar­ket rate. In its 2024 to 2026 Malawi Eco­nomic Mon­itor, the Bank warns that an over­val­ued offi­cial rate, coupled with for­eign exchange scarcity, hinders eco­nomic recov­ery, encour­ages par­al­lel mar­ket activ­it­ies and acts as a tax on exports. However, eco­nom­ists have expressed mixed views.

Eco­nom­ics Asso­ci­ation of Malawi Pres­id­ent Ber­tha Chi­kadza said while the study shows Malawi is already oper­at­ing under informal mar­ket con­di­tions, uni­fic­a­tion may not imme­di­ately resolve for­eign exchange short­ages. “It is import­ant to note that Malawi con­tin­ues to face sig­ni­fic­ant sup­ply side chal­lenges, and the sug­ges­ted uni­fic­a­tion may not be the best way of address­ing the chal­lenge.

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“Fur­ther, we learn that the recent exchange rate realign­ments of 25 per­cent and 44 per­cent did not do much in nar­row­ing the gap between the offi­cial and the par­al­lel rate but intens­i­fied infla­tion­ary pres­sures,” she said.

Chi­kadza observed that while the policy note is inform­at­ive, the sug­ges­ted realign­ment may not neces­sar­ily trans­late into increased for­eign exchange avail­ab­il­ity and removal of price dis­tor­tions in imports. Mean­while, eco­nom­ist Mil­ward Tobias cri­ti­cised the push for exchange rate align­ment, arguing that it does not address the root cause of the prob­lem.

RBM data show that total reserves stood at $526.8 mil­lion in recent months, equi­val­ent to about 2.1 months of import cover, below the required 3.9 months recom­men­ded by inter­na­tional fin­an­cial insti­tu­tions.

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