The current shortage of foreign currency is deepening into a crisis
The Reserve Bank of Malawi has pressed a panic button for an impending
foreign exchange (in short, forex) crisis. According to the Financial and
Economic Review, at the end of first quarter of 2023, gross official forex
reserves were estimated at US$216.7 million which were just enough for 0.9
month’s imports (Reserve Bank of Malawi Financial and Economic Review Volume
57, Issue 1 accessed on RBM website on 02 June, 2023). Some days ago (Thursday
24th May 2023) the National Oil Company of Malawi, (NOCMA) Limited
a government company that is mandated to import and manage strategic reserves
of petroleum products (in short fuel) reported to the Parliamentary Committee
on Natural Resources and Climate Change that the company owes fuel supplier
(Adax) US$14.8 million. Same story was told by Petroleum Importers Limited
(PIL), that represents a grouping of private sector fuel importers, who said
that they need US$13 million to pay their suppliers. And that since these bills
are due for payment, these companies are facing challenges accessing more open
credits. Some government operations have, for some time now, been reduced to
the minimum or even temporarily suspended due to forex shortage. There are
backlogs of unissued passports at Immigration Department, driving licenses at
the Road Traffic Directorate, and national ID at the National Registration
Bureau, to mention but a few. Contractors of roads and other public
infrastructure projects are missing completion dates in part due to their
failure to access forex with which to import materials and equipment.
This is not a new phenomenon for Malawi in recent years. According to the
Reserve Bank of Malawi, Malawi needs US$3 billion per year (about US$250
million per month) to meet its imports requirements but only generates about
US$1 billion in foreign currency (about 33 percent). Key cause of the forex
shortage has been reported to be a negative trade balance or a trade deficit,
that is, that the value of Malawi’s exports is persistently less than the value
of imports.
The fact that forex shortage is endemic rather than a temporary crisis in
Malawi, means that the country has the skills and experience to survive this
monster. Some of the key economic text book measures that Malawi has been using
include: recourse to international grants and borrowing in foreign currency,
discouraging unnecessary imports through imposition of taxes on certain
commodities, promotion of domestic production of exportable goods and services,
devaluation of Malawi Kwacha against major foreign currencies, and use of a
dual foreign exchange rate system, among others.
I will now focus on the last two measures, that is, the devaluation and use
of the dual foreign currency exchange rate system to argue for the case that
the government through RBM should abolish the dual foreign exchange rate
system, and not to devalue the Malawi Kwacha, in order to address the current
deepening forex crisis in Malawi.
Devaluation of Malawi Kwacha is not a solution
Devaluation is a downward adjustment of a currency value relative to other
currencies with aim to balance trade. Devaluing Malawi Kwacha reduces the cost
of Malawi's exports and increases the cost of imports, rendering the latter
less attractive. The expectation is that exports will increase and imports will
decrease, thereby a better balance of payments is expected as the trade deficit
shrinks. In May last year (2022), the government through RBM devalued the
local currency Malawi Kwacha by 25 percent, in what it termed ‘currency
re-alignment’. However, while the unit value (in US$) of Malawi’s exports has
reduced, the volume of exports did not increase as much to compensate for the
loss in value. On the other hand, the cost of imported goods in Malawi Kwacha
has increased tremendously after the devaluation. Indeed, this has been
witnessed by consumers who have seen prices of imported goods and services
rising each day. In some cases, shop owners have failed to replenish some goods
either that they do not have forex for importation or for fear that at new prices,
the goods will not sell as fast to make a business sense. Empty shelves or
guised re-arrangement of goods display in some high-end supermarkets and
closing down of some air ticket sale shops, are telling. In short, the 25
percent devaluation of Malawi Kwacha that was effected in May last year, has
failed to stabilize the forex situation in Malawi. As such, another devaluation
will just elevate further the cost of public debt service and worsen the
already fragile forex situation.
Dual foreign exchange rate system is a silent enemy
Malawi is using a dual exchange rate where foreign currencies are being
exchanged in the banks at both fixed official exchange rate currently at US$1
to K1,036 and a floating rate that is currently averaging at US$1 to K1,550. Principally,
a dual foreign exchange rate system is adopted as a short-term solution for
dealing with an economic crisis, as a way to lessen pressure on foreign
reserves that results in capital flight by investors.
Dual foreign exchange rate system is, however, susceptible to manipulation
by parties with the most to gain from currency differentials. Forex bureaus and
banks that maximise on the spread between the bureau rates (now averaging US$1
to K1,550) and the official exchange rate published by the Reserve Bank of
Malawi (of US$1 to K1,036), have been enjoying a mark-up of K514 per US$1 sold,
about 50 percent. Other beneficiaries are exporters and importers who
deliberately do not properly account for all of their transactions in order to
maximize currency gains. There are reports that import bills are inflated by
some unscrupulous traders who illegally externalise forex[i].
Equally, there are reports of companies which are quoting lower than actual
prices of their exports, and hence proceeds (in US Dollars) remitted back into
Malawi might be lower than the actual proceeds[ii].
Chimjeka (2022) stated that Reserve Bank of Malawi acknowledged that at least
K500 billion might have been illegally externalised out of Malawi in 2018[iii].
While some companies are pushed into these illegal foreign exchange
externalization activities in order to meet their legitimate external financial
obligations in the face of forex restrictions via the legal channels, other are
purely motivated by profit, and the latter tend to push to keep the dual
foreign exchange system in place even when it is not useful or it hurts the
wider economy.
Dual exchange rate system drives inflation in Malawi Kwacha prices due to
the shifting of transactions to the parallel exchange rate as well as the
depreciation of the parallel rate compared to the official fixed rate. Indeed,
most private sector business people who import goods into Malawi, are accessing
forex at bureau rate even in the banking halls. To remain afloat, they are
forced to increase the Malawi Kwacha price of their imported goods. This is
attested by the continuing rise of prices of imported goods in supermarkets and
other stores, even way after the devaluation of Malawi Kwacha. This is also
reflected in the general inflation rate that has been consistently high and
rising even with intervention of various monetary policy measures by the
Reserve Bank of Malawi.
While the private sector players are willing to buy forex at the bureau
rate, as they have the privilege and flexibility to switch to other products,
and/or adjust their Malawi Kwacha prices at will, it is not the case for
government agencies, whom, as a matter of law, are obligated to supply the
goods and services at a fixed access fee regulated by government. The shortage
of materials for producing national passports, national IDs and driver’s
license may reflect reluctance of commercial banks to sell the forex to these
government agencies at the official exchange rate, while preferring to sell the
same to the private sector at the bureau rate. Meanwhile, the little forex
under the RBM’s official reserves is rationed and mostly preserved for more
politically pressing imports such as fuel, fertilizers, medicines, etc.
Like the pure fixed foreign exchange rate system, the dual foreign exchange
rate system also triggers black markets as government-mandated restrictions on
currency purchases force individuals to pay much higher exchange rates for
access to dollars or other foreign currencies. The existence of a dual exchange
rate and a currency black market takes most forex transactions out of the
purview of the monetary policy authorities, the RBM, and therefore, contributes
to the country’s long period of forex instability.
Conclusion
Like many other strategic commodities, forex should not be left in the
hands the private sector at will. To avert this forex crisis, the Government of
Malawi through the Reserve Bank of Malawi need to temporarily abolish the dual
foreign exchange rate system. This action will bring decency in forex market.
This will also make it easier for contractors seeking forex to import
equipment and materials to implement government funded projects in mining,
agriculture, health, education, energy, etc., as there will not be any
preferential sale of forex to the high-priced fast-moving consumer goods sector
by the private sector.
Furthermore, tobacco farmers whose prices are quoted in US$ will get a
relatively real value for their money because the commercial banks buy them at
the official rate rather than at the bureau rate. Currently, there are media
reports that some farmers are opting to sell their tobacco leaf to the vendors
who in turn smuggle it to Zambia. These farmers claim that they get a price of
about K4,500 per kg about US$4.34 per kg. This price is far above what is
offered on the Tobacco Auction Floors (average US$2.23 for the first seven
weeks this year). By smuggling the Malawi’s number one forex earner, Malawi
loses not just the forex but also revenue in taxes.
Similarly, exporters of Malawian merchandise would desist from malpractices
of under-reporting or even smuggling, if the hard currency US Dollars that they
bring will be sold at the same rate as the official rate in order for them to
acquire Malawi Kwacha.
Last but not least, diaspora would be more willing to send money via
commercial banks knowing that there is no strong incentive to risk carrying
cash to trade at better price in the bureau or black market. All this money
would be available in the purview of the Reserve Bank of Malawi to
rationalize its usage aligned with national priorities.
[iii] Chimjeka, Rabecca. (2022) “Court convicts couple over K5 billion forex externalisation”, Times Online, 5th March 2022 accessed at https://times.mw/court-convicts-couple[i]over-k5-billion-forex-externalisation/
