The International Monetary Fund has told Malawi to devalue its kwacha to address its foreign exchange shortage and stem its thriving black market.
Malawi should devalue the official exchange rate further to between 230 to 250 against the dollar to address a foreign exchange shortage and stem a thriving black market, the International Monetary Fund (IMF) said.
Malawi devalued the kwacha by 10% in August, but at 166 kwacha to the dollar, the official rate is not as attractive as the black market rate of between 240 and 250 kwacha.
Reserve Bank Governor Perks Ligoya in November said Malawi might be forced to devalue its currency further and said some adjustment to the exchange rate would be good.
The IMF said the overvalued exchange rate has led to foreign exchange market rationing and multiple exchange rates which are key deterrents to private sector activity and diversification.
“The objective of the devaluation is to remove some of the demand for foreign exchange by putting the price for foreign exchange to a more market-determined level,” the IMF said in a memo seen by Reuters, after its visit to Malawi in December.
“In addition, the supply of foreign exchange will be encouraged to move back to the formal market from the informal market as the price differential between the two will be closed up. The informal market will be significantly reduced.”
Unified foreign exchange
The fund also recommended that the central bank remove all restrictions that it announced early last year and foreign exchange bureaus be allowed to set prices.
“The objective of this is to unify the forex bureau and informal market at a market determined rate and provide a market based signal of the exchange rate—albeit from a relatively small part of the entire market,” the IMF said.
Malawi’s foreign exchange inflows are seasonal. During the harvest period—April to September—there is usually enough supply of foreign exchange from mainly tobacco exports. The lean period is between September and March when the central bank becomes the sole supplier of dollars which come from the country’s development partners.
The dollar crunch has worsened because of low tobacco earnings and after key donors, including Britain, withheld budget support.
The IMF’s visit in December was at government’s request for technical assistance in attempts to bring back suspended aid.—Reuters