By Masina, Lameck
African Business , No. 383
Malawi is battling severe fuel and foreign exchange shortages, in a country where 39% of the 15m population live on less than $2 a day. The Malawi kwacha had been officially trading at MK165 to $1 following its last devaluation by 10% in August 2011, following pressure from the IMF.
However, IMF authorities had been arguing that the 10% devaluation was minimal and pushed for further devaluation to MK250 to $1 to bring it into line with the flourishing parallel market, which had been pegging the kwacha at between MK250 and MK300 to $1.
The recommendation was part of an IMF conditionality that would enable Malawi to win back the country's three-year Extended Credit Facility (ECF) arrangements, which the IMF suspended last year over what they called failure by the government of Malawi to adhere to conditions attached to the fund.
The IMF mission chief to Malawi, Janet Stotsky, had urged the government authorities to quickly make significant adjustments in their macro and micro economic policies that would lead to the resumption of the programme.
In their December report Liberalisation of the Foreign Exchange Regime for Current Account Transactions and Exchange Rate Flexibility, issued after a week-long fact-finding mission on Malawi's economic management, the IMF mission had observed that Malawi's overvalued exchange rate was causing persistent imbalance on the exchange rate market.
"An overvalued exchange rate has in turn led to foreign-exchange market rationing and multiple exchange rates, which remain key deterrents to private sector activity, growth and diversification," reads the report in part. The report had also cited the recent reduced aid flows and an exceptionally poor tobacco market as some of the issues that had exacerbated the acute shortage of foreign exchange in the country.
Malawi started to experience a reduction in aid flow in 2011 soon after President Mutharika's government expelled British envoy Fergus Cochrane-Dyet over his leaked cable to London, in which he accused Mutharika and his government of being self-centred and arrogant.
The suspension of Malawi's ECF programme in mid 2011 had also led to most donors withholding their budgetary support, which had accounted for 40% of the national budget.
However, Mutharika had maintained that his administration would never devalue the kwacha, arguing that doing so would further hurt consumers in the country as prices of commodities and services would go up. He chided some local economists who were backing devaluation, saying they were "thinking like colonialists".
Mutharika said devaluing the currency further would invite national economic depression and that he would not buy economic orthodoxies that would hurt Malawians. the President said he had maintained a stable kwacha in his rule.
Mutharika pointed out that when former President Bakili Muluzi took over government from the one-party regime of the Malawi's first President, Kamuzu Banda, in. 1994, the kwacha was around MK54 to $1, and when Muluzi had handed over power to him in 2004, the currency was valued at MK150 to $1.
Economic commentators have been attributing the overvalued kwacha to the current forex shortages the country is experiencing. …