Malawi central bank justifies devaluation of kwacha

Reserve Bank of Malawi on Monday devalued the kwacha by about 50 percent to appease the International Monetary Fund and unlock much needed aid held up by the country’s key donors.

 The Fund suspended a $79 million aid facility due to conflict with previous President Bingu wa Mutharika. The IMF had called for a 50 percent cut in the value of the kwacha.

The  Bank of Malawi said it was also prompted to cut the kwacha because most foreign transactions were being conducted at a black market rate nearly double the official rate. 

The kwacha was trading at K250 to the greenback on Monday from the previous peg of 168 and closer to the black market rate of about 275.

“At K250 per dollar the exchange rate is well adjusted as the black market is certainly under-devalued,” the Reserve Bank of Malawi said in a statement.

“Most importantly, it should also, together with the liberalisation of foreign exchange market, contribute to government’s efforts to reach early agreement with the IMF which should leading to unlocking donor flows in the next few months,” it said.

 The bank will allow international tourists to settle bills in any major currency. 
    Dollars earned through tobacco sales, which usually account for 60 percent of Malawi’s foreign currency revenues, can now go through commercial banks instead of through the central bank.

    “All forex restrictions announced last year in August on forex bureau have been suspended since this is now a free floating foreign exchange regime,” Charles Chuka, the central bank governor, told reporters

Deputy governor economic services Dr Naomi Ngwira added that the price adjustments expected with the devaluation will be minimal and therefore inflation will ease up minimally.
   
Mutharika, who died last month of a heart attack, had blocked the reevaluation of the currency because of the impact on the poor masses. This led to the  suspension of budget support which traditionally accounts for about 40 percent of the budget.

Former colonial master Britain and major aid donor the United States froze aid packages worth nearly $1 billion in the country with an estimated GDP of $5.6 billion.

Petrol, drugs and other items purchased abroad with hard cash grew scarce with people lining up for days for a few litres of gasoline. Goods for the domestic market were sold over the border to earn foreign currency.