Sunday, December 6, 2009

Malawi’s forex blues: What went wrong?

The country is in deep foreign exchange crisis. The central bank will be rationing the little foreign currency the country has.
Local manufactures are threatened because they depend on this scarce resource.
The Reserve Bank of Malawi (RBM) recently announced s projected 7.7 per cent economic growth, a downward spiral from the 7.9 per cent announced by Finance Minister Ken Kandodo when he presented his budget statement mid this year.
The economy seems to be wobbling towards the right direction yet Malawi is in a foreign exchange crisis of sorts. Just what went wrong, where?
Financial pundits agree that Malawi has been a net importer since attaining independence from former colonial master Britain in 1964. This means the country can not generate enough forex revenue and keep it within the country for long.
And Malawians must simply get used to this, says Thomas Munthali, president of the economic think tank- the Economics Association of Malawi.
Munthali says Malawi will never have adequate forex even during the best of economic times when donor inflows trickle down well enough, and the number one forex earner tobacco fetches well on the unpredictable market.
He attributes the country’s ongoing foreign exchange crisis to last year.
“The first mistake was that we bought too much fertilizer at very high prices in 2008, for use in the Farm Inputs Subsidy Programme. Fertilizer prices, which averaged US$650 in 2007/08, more than doubled to US$1600 per tonne in 2008/09 growing season. Despite all this price escalation, government bought an extra 83, 000 metric tonnes above what was required,” says Munthali.
This led to a more than doubled fertilizer import bill. Similarly, the high fuel prices in early 2008, which went as high as US$150 in July 2008, led to a more than doubled fuel bill towards the end of 2008 to early 2009, defining this year’s fate for Malawi.
The extra 83, 000 metric tonnes, feels Munthali, might have been imported due to prevalent fears that the prices would go up again- a good decision gone bad.
“This led to tying up of forex into stocks that could only be locally sold to the private sector under buy-back arrangements but in local currency. This was the one single mistake by government, but one which could not have been foreseen,” adds Munthali.
The economist says although it was a mistake made in the best interest of the nation, government should not have gone ahead because “the reading on the wall was showing signs of tapering off of the prices and we could have bought just what was enough”.
Munthali’s sentiments are shared by RBM’s General Manager Wilson Banda. He acknowledged that the crisis started as a result of a huge importation bill of fuel and fertilizer.
Banda said this, compounded with this year’s low tobacco earnings and the phenomenal economic growth the country has experienced in recent years, has caused forex shortages.
Malawi Confederation of Chambers of Commerce and Industry (MCCCI) president, Harrison Kalua, says the economy is moving in the right direction and this has resulted in people having staggering amounts of local currency.
This, too, is said to have fueled forex shortage problems.
“Because people have money, the demand for luxurious goods is high. We do not manufacture these goods, we import- therefore, we are using a lot of forex. We also require more forex,” said Kalua.
He added that, with increased agricultural productivity, the country was importing too much fertilizer.
“So, what has drained our forex is fertilizers and fuel,” he said.
Now that Malawi is nursing a forex shortage crisis, what is the way forward?
State President, Bingu wa Mutharika- himself a renowned economist- issued a directive last Wednesday to all ministers, their deputies and senior public and parastatal officials, asking them to cut down on foreign trips.
But Munthali argues that Mutharika should lead by example and reduce his entourage on his foreign trips. He advises the president to include only staff that would add value to such trips.
Former leader of opposition in Parliament, John Tembo, is on record to have slammed Mutharika over frequent foreign trips. Tembo, who got dethroned from the position last week, said Mutharika was proving to be one of the most frequent, exorbitant travelers in Malawi’s history, in the process drowning scanty government resources.
The fact that the country does not generate adequate forex implies that the black market will continue to thrive, even when the official rate is placed at its real value, analysts warn.
“The best way forward is to ensure that the local (Kwacha) currency stays at its true value so that exporters have it in abundance and can tap on it every time they need. There is also need to cramp down on the black market: fiscal police, RBM Intelligence Bureau, Immigration Department need to work closely in this regard, efforts that will help in sniffing off any forms of forex evasion and black market growth,” suggests Munthali.
Renowned economist Priston Msiska suggests that RBM works closely with commercial banks in minimizing importation of luxury goods.
Msiska faults commercial banks for easily facilitating importation of luxury goods. He adds that, at the end of the end, these items add up to million of United States Dollars annually.
“We also need to increase our efforts in generating forex. Currently, there are no incentives for the export business. Unless government comes up with incentives to export-business, people will continue to shun it and we will still have the problem perennial forex shortages,” he said.
One of such incentives could include non-charging of interest on half the money borrowed by people involved in export business, observers say.
The other exit strategy could be by creating companies locally, companies that will specialize in producing much sought after luxury goods.
“That’s the only way we can reduce our import bill,” says Kalua.

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