The International Monetary Fund wants Malawi to devalue the official exchange rate to between 230- 250 USD/MKW range, says a confidential aide memoire from the Fund’s technical team that visited the southern African nation last month.
Malawi had asked the IMF for technical assistance in an attempt to bring the suspended Extended Credit Facility programme back on track. The programme was classified off-track after Malawi failed to devalue the Kwacha among other IMF demands.
“The objective of the devaluation is to remove some of the demand for forex by putting the price for forex to a more market determined level… the Fund says in the aide memoire titled Liberalization of the foreign exchange regime for current account transactions and exchange rate flexibility.
Malawi’s official exchange rate remains overvalued, causing persistent imbalance in the foreign exchange market. Currently the black market is at about MKW250 to a dollar, much higher than the official rate of MKW166 to a dollar.
“In addition, the supply of forex 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,” reads the report in part
The Fund has also recommended that the forex bureaus should be allowed to trade in forex with anyone at prices of their own choosing asking the Reserve Bank of Malawi to remove all restrictions bureaus that it announced early last year.
“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,” says the IMF.
An overvalued exchange rate, in turn has led to foreign exchange market rationing and multiple exchange rates, which according to the IMF, remain key deterrents to private sector activity, and diversification.
Reduced forex inflows because of a freeze in budget support from key donors and earnings from tobacco– the country’s mainstay-have worsened the dollar crunch. It remains to be seen whether Malawi will adopt the IMF recommendations this year. But President Mutharika has already signaled that he wont.