Despite Malawians facing the high cost of living, the country’s Central Bank, Reserve Bank of Malawi (RBM), has reached a decision to devalue its local currency (Malawi Kwacha) by 25% effective Friday May, 27, 2022.
In a statement released on Thursday May 26, 2022, RBM said the devaluation is due the liquidity challenges from the pandemic, the rising commodity prices following escalation of Russian-Ukraine war and the geo-political tensions coupled with Cyclones Ana and Gombe.
RBM added that the Supply-demand imbalance has manifested in the domestic foreign exchange market in a number of ways, including low foreign exchange supply, declining official foreign reserves, and widening spread between ADBs TT and forex Cash exchange rates.
However, in response to the foreign exchange liquidity challenges and their effects on exchange rate developments, the RBM said it instituted the following short-term measures which did not work out at all:
1. Continuous interventions in the foreign exchange market in order to support importation of strategic commodities and avoid excessive volatility of the Kwacha exchange rate
2. Temporarily introduced mandatory sale of 30% of export proceeds to the Bank within two working days from the date of receipt, and
3. To close arbitrage opportunity arising from the fact that only trads denominated in the US dollar were subject to the reasonable differences on spreads rule.
Meanwhile, the central bank has highlighted that the devaluation will likely add pressure on inflation but says it is committed to prudent monetary and fiscal policies in order to contain all inflationary pressures within manageable limits.
Commenting on the matter, an economist and a lecturer at the Malawi University of Business and Applied Science ( MUBAS) Betcheni Tchereni said Malawi imports most of the commodities from elsewhere and following the devaluation, prices of almost every commodity will go up.
Tchereni said the price of foreign currency on the black market will also go up.
“We are going to see prices of many of those commodities going up. When we say many of those commodities, we mean everything because Malawi imports almost everything.
“Salaries for those who work will remain the same unless we are told they are going to change. Those who do not work at all, they are going to have problems to purchase the commodities and the middle class will be wiped out” said Tchereni.
He added that in the next two to three months, Malawians should expect welfare losses.
The devaluation comes at a time when government is in talks with International Monitory Fund (IMF) team for a new Extended Credit Facility to relieve Malawi from the current economic turmoil.