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| Exchange rate band tough job for RBM |
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by
Ephraim Munthali, 02 December 2004
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10:01:12
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Financial market players and economic experts say the reintroduction of the exchange rate band system in Malawi could create some certainty in businesses but warned that the Reserve Bank of Malawi (RBM) will have a tough time managing the regime.
President Bingu wa Mutharika—on record as having told business leaders that he will never allow the kwacha to devalue during his five-year term—announced the resurfacing of the band last Friday.
Mutharika said the system will help stabilise the local currency but did not say what will be the base or the ceiling.
When contacted for more details on the system’s mechanisms on Tuesday, central bank governor Elias Ngalande said he believed the President had explained well enough and did not see the need to elaborate.
Exley Silumbu, a senior economics associate professor at University of Malawi’s Chancellor College said the system’s success would depend on the amount of foreign exchange reserves held by the central bank.
“The move will bring some certainty to businesses but if official foreign exchange reserves run dry, the RBM will be cornered by the market,” said Silumbu, a former chief economist at the Malawi Confederation of Chambers of Commerce and Industry.
Silumbu hoped that the central bank has experimented with the system and has proved its practicability otherwise the bank could find itself in an awkward situation.
Economics professor Ben Kalua, who is also from Chancellor College said the move is “acceptable” as it could help avoid speculation and bring business confidence in the local currency.
“Speculation is the most immediate danger to the kwacha after poor international relations. However, coming at a time when we already have problems of low forex reserves and foreign aid is not yet guaranteed, the Reserve Bank will find it hard to manage this,” said Kalua.
Stanbic Bank (Malawi) economist Kondwani Mlilima agreed with Silumbu that the management of the kwacha using a specific band should be supported by the amount of resources in the economy.
But Mlilima said using the band to curb exchange rate speculation might not be easy because the market can still exploit the gap between the base and ceiling to their advantage.
He explained that exporters would find the lower band (depreciation) ideal while importers would benefit from the higher band (appreciation).
Speaking in his personal capacity, National Bank of Malawi senior dealer Wilson Mlauzi, said he expects the RBM to control the band by injecting forex into the system in times of shortage and buying back in terms of plenty.
“I think the monetary authorities want to remove exchange rate fluctuation fears. Bands are normal and used in several countries the world over,” said Mlauzi.
Dealers Association of Malawi (Deama), who on Tuesday promised to release a statement on the subject after being contacted for comment, grew cold feet at the last minute yesterday.
“Sorry, I consulted my colleagues in the association and we feel we should not comment on the issue,” said Deama president Edward Chilima.
Malawi has since independence undergone different exchange systems, beginning by introducing the Malawi pound which was pegged at par to the British pound before the coming of Malawi kwacha in 1971—pegged at K2 to the Queen’s pound.
The country moved from a fixed exchange rate regime in 1994 when the kwacha was floated in an auction system before the floating was managed using an exchange rate band.
But, when the free-floating system was introduced in 1998, exchange rate band was dismantled before the RBM stopped guiding players on rates.
Since then, the official rate is derived from an average of the previous day’s middle rates of the nine authorised dealer banks in the country, according to RBM general manager (economic services).
Analysts said yesterday they suspect the central bank to have been using the band system since early this year. This could explain the Kwacha’s stability, which hovered around K108 and K115. |
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