Uncle Meke

Suppose 100 million usd enters Malawi in October. At an official exchange rate of MK1,733 per dollar, that translates to approximately MK173.3 billion. Under forward contracts, the kwacha equivalent could be as high as MK250 billion. But actually, this money is exchanged on the black market, where the same 100 million usd fetches MK400 billion. This raises important questions about monetary policy, liquidity and inflation. Where does the additional MK150 billion come from when foreign exchange is traded at these rates? Does this create additional money in circulation, or is existing liquidity simply changing hands? If new kwacha is created to finance these transactions, what are the implications for the money supply, inflation and the purchasing power of the kwacha? Ultimately, how does this affect the ordinary Malawian? When more kwacha chases the same goods and services, does it put further pressure on prices and weaken the purchasing power of our salaries? How does the Reserve Bank account for these transactions, and what does this mean for its efforts to control inflation and stabilise the kwacha? I am genuinely open to learning. I want to understand the mechanics of how these transactions affect the money in our economy and, ultimately, how far can an ordinary Malawian’s salary or whatever they earn from their hustles go?!