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Monetary authorities have accused the authorised dealer banks (ADBs) of abusing the liberalisation of foreign exchange market in Malawi.
Wilson Banda, Reserve Bank of Malawi (RBM) general manager (economic services), said while the introduction of flexibility in the exchange rate system has improved over the past 10 years, the system has bred competition among banks which is leading to some malpractices.
“Some banks [are] resorting to unscrupulous tendencies such as trading outside their published rates and misinformation in the face of ensuing cut-throat competition in the market,” Banda said in his presentation at the Dealers Association of Malawi (Deama) second annual conference in Mangochi on Saturday.
In the paper entitled ‘Exchange Rate Management Under Monetary Targeting’, Banda said other challenges of liberalisation include rampant speculation which, he said, is heightened by “temporary seasonal shortages in foreign exchange availability.”
Malawi moved from a fixed exchange rate regime on February 7, 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 (ADBs) in the country.
According to the Banking Act of 1989, since the 1980s, the primary aim of the exchange rate policy in Malawi has been “to maintain external reserves so as to safeguard the international value of the Malawi currency maintain external reserves.”
Banda said over the years, RBM has changed its focus from targeting the level of the exchange rate to concentrating on the management of foreign reserves as a portfolio.
“Theoretically, therefore, to the extent that the monetary authorities no longer target specific exchange rate levels, the exchange rate ceased being an operating target,” he said.
Banda’s presentation came one year after Deama stepped on RBM’s raw nerves when it accused the central bank of fuelling rapid exchange rate losses.
Deama is on record to have said a measure of indiscipline ruled the market at some point when some dealers—acting on the basis of demand and supply—raised rates beyond market expectations taking advantage of forex shortages.
But RBM governor Elias Ngalande hit back saying the kwacha would not have lost value by more than K20 to K109 within eight months if everyone in the market was “behaving.”
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