Malawi warned over exchange rate

Maintaining an overvalued exchange rate has “very serious” implications on the private sector, which in turn affects economic growth in the end, a systems advisor for National Smallholder Farmers’ Association of (Nasfam), Simon Oosterman, has said. Oosterman made the remarks during a paper presentation on exchange rate management and devaluation ‘ past and present ‘ by RBM Governor Victor Mbewe in Lilongwe recently. He said maintaining an overvalued exchange rate has “very serious” implications on the private sector, which in turn affects economic growth in the end. He cited failure of exporters to receive their full benefit of their export sales, foreign currency hoarding, shortage of foreign currency that reduces the efficiency of trade as some of the examples. Oosterman noted that exporters are effectively paying at the market rate for their imported goods and then only receiving the official rate for their exports, a difference of 10-15 percent. “Importers, including the government, are benefiting from the difference between the official rate and the market rate. If they had to buy forex at the market rate, their import costs in Malawi kwacha would increase,” said Oosterman. He added that the government and importers that were able to get foreign currency through the official channels were effectively being subsidised by exporters. The Nasfam official therefore said the current exchange rate policy was not pro poor as the majority of the poor were unable to buy most of the imported consumer goods. He suggested that the Malawi kwacha should be allowed to find its market value and preferably be somewhat undervalued to compensate for the distorting structural impact of large donor inflows. But Mbewe attributed the problem to the country’s narrow export base, impact of droughts, market failure and reduced donor inflows in the recent years. “Fundamentally, the economy’s narrow export base means that the demand for foreign exchange exceeds its supply, by far. This in turn has serious ramifications on the functioning of and the management of exchange rate system in the country,” said Mbewe. He said this limits the flexibility of the central bank to adopt an optimal exchange rate policy and interferes with the price discovery function of the foreign exchange market. “Thus, functioning of a flexible exchange rate regime has persistently been haunted by ratchet exchange rate depreciation and excessive market speculation and hence lately the fear of floating,” he added. He, however, said the Reserve Bank of Malawi was implementing a managed float system to mitigate the problem and would revert to a fully market based system as suggested by Oosterman when conditions are right. Meanwhile, two teachers form the Scottish capital Edinburgh will be among a group taking part in a new aid project in Malawi. Susan Arnett, from Dean Park Primary School, and Ruth Tibbs, from Prestonfield Primary School, will join 10 others from across the country in travelling to the southern African country. The 12 will travel to the Dedza area next month to share their skills in literacy and numeracy as well as development planning and management. The trip is supported by the Scottish Executive and is part of the education strand of the Co-operation Agreement signed between Malawi and Scotland last November. International Development Minister Patricia Ferguson said: “I am looking forward to seeing how Scotland’s partnership with Malawi is helping to improve the lives and opportunities of people in Malawi. “I am sure these Scottish teachers will build on the good work being done by many Scots in Malawi while enriching their own lives and the lives of their pupils at home in Scotland.” Malawi, like many other southern African countries, has been hit by perennial droughts in recent years. However, this year there are better prospects of improved harvests, especially in respect of maize, given fairly good rains the region received this season.

May 2006
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