By finally correcting the exchange rate, RBM has giving the economy a ‘healthy’ path to recovery—Finance Minister

* In fact, the Reserve Bank of Malawi should have done this a long time ago

* So that we would not have lost so much time and so many opportunities under the shade of a false exchange rate

* Additionally, if this had been done early enough, we would have had a smaller adjustment in the exchange rate

* But now we are having to deal with such a big adjustment because the correction was left too late

By Duncan Mlanjira

In view of some misinformation that circulated in the days since the devaluation of the kwacha by the Reserve Bank of Malawi (RBM), Minister of Finance & Economic Affairs, Simplex Chithyola Banda says the exchange rate correction was necessary and long overdue.

At a press conference in Lilongwe today that was called to update Malawians on the Action Plan that has been effected towards the recovery, development and protection of the economy, Chithyola Banda  likened the exchange rate situation to that of “a tree with an infected and rotting trunk”.

Thus he said there were only two options — “either we cut the trunk so that it can grow healthily again, even though doing so will result in the temporary loss of the shade that protects us from the sun’s heat, or we continue to enjoy the shade until the cancer of the tree spreads to the roots and kills the whole tree permanently”.

“By finally correcting the exchange rate, the Reserve Bank of Malawi has chosen to give us a healthy tree that will grow again and give us better shade in the future, rather than a dying tree that gives us shade today but that will not bear any fruit going forward.

“In fact, the Reserve Bank of Malawi should have done this a long time ago so that we would not have lost so much time and so many opportunities under the shade of a false exchange rate.

“Additionally, if this had been done early enough, we would have had a smaller adjustment in the exchange rate, but now we are having to deal with such a big adjustment because the correction was left too late.

“But better late than never, assured the Minister, adding that President Lazarus Chakwera appointed him as Minister of Finance & Economic Affairs last month “to oversee the work of making the painful corrections that have long been neglected in the past in order to create the conditions for economic recovery, development, and protection going forward.”

He stressed that RBM needed to make 44% re-alignment of the kwacha against the US$ for three reasons — that included that the kwacha was overvalued and was hurting local production of goods and services.

“When people find it cheaper to import things than buy locally-produced goods and services, it is an indication that the exchange rate has gone haywire.

“If this was allowed to continue, the long-term result was going to be the death of local production and turning Malawi into a dumping ground for cheap foreign goods that add no value to our economy’s productivity, and that is a recipe for disaster.

“This adjustment, therefore, allows us to focus on spending forex reserves on production for exports and revenue generation, not on consumption of imports that drain reserves without replenishing them.”

He also indicated that the overvalued kwacha “was scaring away foreign direct investors”, adding that RBM was having to spend too many of the country’s foreign reserves just to sustain the low exchange rate — which was becoming unsustainable in the wake of USD shortages”.

“As a result, even the importation of strategic commodities that boost production, such as fuel and fertilizer, was becoming a challenge. Consequently, investors were starting to shun Malawi as an investment destination, because no one would want to bring US dollars into an economy that undervalues those dollars by more than 50% — nor would international banks want to give investors the necessary lines of credit to invest in such an economy.

“Even remittances of forex from abroad were shrinking, as people were resorting to transactions through informal and risky channels rather than through credible financial institutions.”

He continued to emphasize that as an overvalued kwacha, it “was promoting the growth of a criminal and illegal black market [which] was undermining banks, with people even buying foreign exchange from banks cheaply and later on selling that same forex at high premiums on the black market”.

“As a result, the risk of collusion between the black market and some corrupt bankers was great, and we could not allow our banks to be raided by criminals, nor could we allow a situation to continue where legitimate businesses could only access forex by buying it from criminals.

In view of the currency re-alignment the RBM has undertaken, the Minister thus announced the accompanying measures and strategies “that will ensure that the intended purpose of the re-alignment – which is the enhancement of the country’s foreign exchange reserves to catalyse productivity, trade, and investment – is achieved”.

“The measures are also aimed at cushioning the vulnerable sections of the population against the adverse and unintended effects of this re-alignment, while also ensuring that the past policies and acts of negligence that got us into this mess never happen again.

“In fact, the pain we are all feeling from this currency realignment should teach us to denounce our habits of allowing government administrations to effect bad economic policies that kill our productivity and promote endless consumption, allowing governments to deceive us into feeling like all is well when there is a cancer killing our economy, and demonizing any government that comes to tell us the truth and make the painful corrections necessary for our economy to heal long term.

“This is a moment of soul-searching reflection and repentance of all the bad fiscal policies of the past thirty years, because it is only by repenting of our past mistakes that we create highways of hope into the future.”

He said the way the economic business was since 1994 was like makolo kutenga ngongole mkuidya, kenako mkuwauza otikongozawo kuti ngongoleyi adzabweza ndi ana komanso zidzukulu zathu (a case of parents taking huge loans and passing it on to their children and grandchildren).

“What we have seen since 1994 is the attitude even by public officials of entitlement to consumption of public resources without justification. That’s why we had stories of officials from Reserve Bank paying themselves over K20 million a month and over K300 million per year — earning multiple times more than Presidents and Ministers, and yet leaving the financial sector to its own devices and leaving banks to prey on Malawians with exorbitant interest rates that do not grow production in the economy.

“What we have seen since 1994 is endless borrowing with no resulting benefits to the economy, and as we speak, our national debt is in the region of MK10 trillion, 60% of which is domestic and the remaining 40% is external.

“Most of the debts were having unreasonably high interest rates and shorter repayment period, which means that even if we work hard to produce value, our earnings just go to repaying debt instead of developing our country.

“This is the cost of our insatiable appetite for consumption, and we need to stop thinking that those who just plunder our resources are heroes. I say this because I know we have locations in this country that celebrate economic plunder.”

He gave an example of a location near Bingu National Stadium, which was nicknamed ‘Ndatola’ which he alluded that the land was developed at supersonic speed from funds people acquired during Cashgate.

“As you drive towards Kanengo we have a place in the New Area 43 called Cashgate [which was] a celebration of economic chipwirikiti (chaos), and we are now going to start the painful journey to correct it.”

The three parts of his Action Plan include:

Recovery

In discussions with the International Monetary Fund (IMF) for extended credit facility (ECF) and other development partners for resumption of budget support, Malawi is controlling and rationalizing its expenditures by addressing the 4Fs – forex, fuel, food & fertilizer.

“We have done currency rate alignment and we will continue with reforms in the revenue mobilization side and other reforms. Remember if we want to recover we must do radicle reforms and there is no alternative to reforms, a do-nothing scenario will only get the economic situation worse.”

Development

Government has intensified its efforts to diversify the Malawi economy by exploring some other growth potential areas like:

* Carbon credits trading and climate smart funding by engaging all developers of projects with carbon sequentialization potential for a possible sharing of the carbon credit proceeds;

* Mining discounted projects, through quantifying mineral deposits and monetize them and engagement of experts has commenced to quantify the country’s mineral deposits to attract potential investors for possible value discounting in order to enhance the country’s foreign exchange earnings;

* Cannabis biomass projects where export markets have now been secured for the Malawi gold — with joint venture negotiations between Government institutions and private sector investors are at advanced stages;

* Golden Visa programme; exploring the possibility of issuing out golden citizenship to international investors where Malawi can generate more forex.

* Diaspora revenue; through establishing diaspora cities (DCs) and also develop policies that would help members of the diaspora community to invest back home.

Government will roll out its diaspora engagement through creation of DCs in Zomba, Mzuzu, Blantyre and Lilongwe where citizens living abroad will be given an opportunity to buy residential and commercial plots through Ministry of Lands in a simplified process.

Diaspora Cities will be designated areas where investors will provide social service delivery amenities like schools, clinics, shopping centers and recreational facilities. A detailed Action Plan will be released by the Ministry of Lands in the next few weeks.

To complement this initiative, Government has commenced negotiations with cooperating countries for labour exports such as doctors, nurses and teachers.

* Mega farms to increase agricultural productivity; Discussions in advanced with potential private sector players for their participation in the mega farms initiative and to work with existing Government institutions.

* Within months, construction of industrial parks for value addition & export diversification will commence in Malawi.

Protection

To develop legal and regulatory frameworks that protect the economy — a water tight legislations that would deter those that would like to play around with the economy.

This includes, with immediate effect, the Fiscal Police, with support from the Financial Intelligence Agency (FIA) and National Intelligence Service including MDF, being mandated to intensify crackdown on all illegal foreign exchange trade in all markets across the country and in boarder areas.

The public is, therefore, warned to resist and report all suspicious incidents of buying or selling of foreign exchange from unregistered vendors. Any individual or entity caught engaging in this business without proper registration and authorization will be arrested, prosecuted, and have their foreign exchange impounded according to law.

The general public or reminded that dealing in foreign exchange without authorization or licence from the Reserve Bank of Malawi is illegal under the Exchange Control Act, 1984.

All authorised and licensed foreign exchange dealers are reminded to always display evidence of authorization or license at a conspicuous place within their business premises.