The Potential Role of Local Currencies Payment Systems in Trade between Malawi and Regional Partners
A summary of the paper by Dr Greenwell Matchaya, presented at public seminar organised by Ecama at Cresta Hotel in Lilonge on firt July.
Guest of Honour: Minister of Finance, Hon. Ken Kandodo, MP
Presenter: Ass. Professor Charles Mataya (PhD)
Discussants: 1. MEJN Executive Director, Mr. Andrew Kumbatira,
2. Chair, Trade and Industry Committee of parliament,
Dr. Cornelius Mwalwanda, MP
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Author: Greenwell Collins Matchaya, PhD , Leeds University-Business School, June, 2010
Summary
The recent foreign exchange shortages in the country point to the economic threats that exist for economies that solely rely on foreign exchange in their daily trade. A study of the literature shows that foreign exchange problems could partially be reduced by carefully establishing local currency payments systems with significant regional trade partners. At the local scale, such arrangements are not rampant at present, however it is noted that the same reasons that could merit the establishment of the local currency payment system between trading nations, also form a good part of the grounds on which large monetary unions such as the European Monetary Union are formed.
Local currency payment systems in the pristine form suggested herein exist between Zambia and Mozambique, Brazil and Argentina, and some elements of this may be traced in The Association of Southeast Asian Nations (ASEAN) and in bilateral trade between Russia and other countries. Prior to the formal launch of the Euro currency, nations in Western Europe also engaged in different kinds of bilateral trade albeit without formal agreements on invoicing designs. In those cases trade invoicing went on through negotiations between importers and exporters and was often settled in nonvehicle currencies although the dollar was also significantly used (Grassman, 1973; Ligthart and da Silva, 2007). Where formal steps have been taken to enhance the establishment of payments systems in trade, it appears that besides ameliorating foreign exchange constraints, local currency payments systems have the potential to encourage international and intra-regional trade and cooperation. This may be so because the arrangements potentially simplify procedures and, consequently, may be expected to reduce the financial costs of operations, stimulating the participation of small scale companies in bilateral trade.
From the perspective of the exporter, the local currency payment system makes it possible to eliminate the exchange risk generated by external sales. In the long run, it seems though that whether such arrangements would be effective in delivering on the objectives for which they were set may be conditional on political will and stability between the cooperating partners. It has to be pointed out though that the evidence is hard to find for the cases of Zambia versus Mozambique, Argentina versus Brazil and China or Russia versus other parties as data doesn’t seem to be publically available. Despite the potential problems of operationalisation of the local currency payment concept, it appears that a careful move towards this goal may be a worthwhile and inevitable step in the development process of Malawi.
Guest of Honour: Minister of Finance, Hon. Ken Kandodo, MP
Presenter: Ass. Professor Charles Mataya (PhD)
Discussants: 1. MEJN Executive Director, Mr. Andrew Kumbatira,
2. Chair, Trade and Industry Committee of parliament,
Dr. Cornelius Mwalwanda, MP
_____________________________________________________________________________________
Author: Greenwell Collins Matchaya, PhD , Leeds University-Business School, June, 2010
Summary
The recent foreign exchange shortages in the country point to the economic threats that exist for economies that solely rely on foreign exchange in their daily trade. A study of the literature shows that foreign exchange problems could partially be reduced by carefully establishing local currency payments systems with significant regional trade partners. At the local scale, such arrangements are not rampant at present, however it is noted that the same reasons that could merit the establishment of the local currency payment system between trading nations, also form a good part of the grounds on which large monetary unions such as the European Monetary Union are formed.
Local currency payment systems in the pristine form suggested herein exist between Zambia and Mozambique, Brazil and Argentina, and some elements of this may be traced in The Association of Southeast Asian Nations (ASEAN) and in bilateral trade between Russia and other countries. Prior to the formal launch of the Euro currency, nations in Western Europe also engaged in different kinds of bilateral trade albeit without formal agreements on invoicing designs. In those cases trade invoicing went on through negotiations between importers and exporters and was often settled in nonvehicle currencies although the dollar was also significantly used (Grassman, 1973; Ligthart and da Silva, 2007). Where formal steps have been taken to enhance the establishment of payments systems in trade, it appears that besides ameliorating foreign exchange constraints, local currency payments systems have the potential to encourage international and intra-regional trade and cooperation. This may be so because the arrangements potentially simplify procedures and, consequently, may be expected to reduce the financial costs of operations, stimulating the participation of small scale companies in bilateral trade.
From the perspective of the exporter, the local currency payment system makes it possible to eliminate the exchange risk generated by external sales. In the long run, it seems though that whether such arrangements would be effective in delivering on the objectives for which they were set may be conditional on political will and stability between the cooperating partners. It has to be pointed out though that the evidence is hard to find for the cases of Zambia versus Mozambique, Argentina versus Brazil and China or Russia versus other parties as data doesn’t seem to be publically available. Despite the potential problems of operationalisation of the local currency payment concept, it appears that a careful move towards this goal may be a worthwhile and inevitable step in the development process of Malawi.
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