Who would have thought two years ago that the Malawi kwacha would by this time be trading at K750 to the United States dollar? And K1,000 to the British pound?
Well, here we are and the fall continues. And nobody now knows where this will stop.
Persistent poor economic management coupled with corrupt ion and fraud in government since 1994 have made it difficult for the country to increase exports, maintain donor aid and stabilise the currency. We have now come to the point where we have completely lost control of the economy and the currency.
The consequences are that the value of people’s pensions and savings are being substantially eroded. Prices of goods and services are going up while incomes are shrinking. Inflation is skyrocketing and lending rates are sky high.
The problem is that even when tobacco exports resume by March or April, there is no guarantee that such will come with stability or appreciation of the kwacha.
The experience of last year suggests that depreciation can still take place in the midst of an export season and while the country is sitting on “healthy” foreign exchange reserves.
The main problem is that there is now low confidence in the local currency since donors indicated that they would not resume balance of payment support to the country. There is certainly a huge belief on the market that Malawi cannot maintain a sound economy without donor support.
And it is that belief that has created huge speculative trading of foreign currency, where everybody is holding on to their foreign currency, hoping to sell it at higher rates the following day, week or month.
Unless solutions are found quickly to tame the situation, things will continue to worsen and it won’t be long from now when the US dollar exchange rate would be running towards the K1,000 mark. The situation would simply become unbearable for the majority of the people.
Dollarisation may sound like an extreme suggestion but is probably something Malawi may have to go for as a solution to the economic crisis prevailing in the country.
Dollarisation is when a sovereign country adopts a foreign currency as its legal tender. If Malawi was to dollarise, the United States dollar would replace the Malawi kwacha as the local currency.
It happened in Zimbabwe a few years ago and things have now stabilised in that country where devaluation is a thing of the past. Foreign currency is readily available and it has now become easy for businesses and people to save and plan ahead.
Dollarisation becomes an option where confidence in the local currency is very low, like is the case in Malawi at the moment.
Governments switch to a more credible hard currency like the dollar as a way of restoring economic stability.
Dollarisation also helps reduce currency risk, thereby providing a stable and secure economic and investment climate. It is generally recommended for developing or transitional economies, particularly those struggling with high inflation.
In many of the countries that opt for dollarisation, businesses and wealthy consumers would already be informally use foreign tender in some transactions although such using would not be an official policy. The use of foreign currency helps to protect companies and individuals against devaluation of the local currency.
With dollarisation, the country’s economic climate becomes more credible and speculative attacks on the local currency virtually disappear
The dimished risk encourages both local and foreign investors to venture into projects and buy shares on the local capital market. And the fact that an exchange rate differential is no longer an issue helps reduce interest rates on both local and external borrowing.
Disadvantages of dollarisation include loss of the government’s ability to directly control its economy, including its right to administer monetary policy and any form of exchange rate regime.
The central bank would also lose its role as a lender of last resort for the local banking system. While it may be able to provide short-term emergency funds from held reserves to banks in distress, it would not be able to provide enough funds to cover withdrawals in the case of a run on deposits.
And because a local currency is a symbol of sovereignty, the use of a foreign currency takes away some national pride.
But what is national pride when people’s lives are becoming miserable due to unending harsh economic conditions? What is national pride when saving has become a huge economic and social risk? What is national pride when the government is failing to provide even the most basic social, of the people due to shrinking national budget?
May be time has come for the Malawi to consider dollarisation as a way of putting to rest currency and economic woes, once and for all.
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