IMF has recommended that government devalue the official exchange rate by about 40 percent so that it is pegged between K230 and K250 against the dollar and allow forex bureaus to sell dollars at any price if the country to solve the current forex shortage.
This would ensure that the country accesses IMF extended credit facility (ECF), which is crucial to unlocking millions of dollars in frozen aid, the institution has said.
In a memo, the IMF says that government has to immediately devalue the kwacha to address a foreign exchange shortage and stem a thriving black market.
But Minister of Finance Ken Lipenga on Friday said government is still engaged with the IMF over issues raised by its technical team in the memo.
In August last year, government devalued the kwacha by 10 percent, but at K166 to the dollar, the official rate is not as attractive as the black market rate of between K240 and K250 or more which, according to the IMF, is stifling private sector growth and worsening the shortage.
The IMF says 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.
Ã¢â‚¬Å“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,Ã¢â‚¬Â the IMF says in the memo after its delegation visited Lilongwe in December.
Ã¢â‚¬Å“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.Ã¢â‚¬Â
The IMFÃ¢â‚¬â„¢s monetary and capital markets and legal departments came to Malawi last December at the request of government to assess how the current legal framework and practice need to be reformed to support the liberalisation of the foreign exchange regime and exchange rate flexibility under the ECF.
The Fund also has recommended that the central bank remove all restrictions that it announced early last year and foreign exchange bureaus be allowed to set prices.
Ã¢â‚¬Å“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,Ã¢â‚¬Â the IMF says.
The IMF says that it is of the view that a move to a floating exchange rate regime is now unavoidable given the situation.
Ã¢â‚¬Å“Either a managed floating arrangement or a free-floating system might be considered…in both systems all economic agents are free to trade FX (forex) with whoever they want at prices of their choosing,Ã¢â‚¬Â the memo reads in part.
The existing restrictions that the Fund wants removed include:
Ã¢â‚¬Â¢ The rules that prescribe the prices at which banks may trade forex with each other in their inter-bank market . There should be no official regulation on the inter-bank market;
Ã¢â‚¬Â¢ The rules that govern the forex bureau market which prescribe the exchange rates;
Ã¢â‚¬Â¢ The surrender requirement that obligate exporters to sell some or all of their forex to either RBM or banks at the official exchange rate.
Lipenga could not say when government intends to implement some of the IMF recommendations.
Ã¢â‚¬Å“Obviously, we are facing an economic crisis and that is why we asked the IMF for support…we remain engaged with them on certain policy measures that may impact on peopleÃ¢â‚¬â„¢s livelihoods and itÃ¢â‚¬â„¢s perfectly legitimate for us to raise these concerns,Ã¢â‚¬Â he said.
A senior diplomat in Lilongwe said in an interview: Ã¢â‚¬Å“Although the 10 percent devaluation which Malawi effected on 8th August last year was a positive step, it could be argued that the benefits of this move were largely negated by the introduction of additional controls on the foreign exchange bureau rate, since the ECF programme is designed to liberalise the foreign exchange market and reduce the number of restrictions.Ã¢â‚¬Â
President Bingu wa Mutharika last week rejected IMF advice, saying the devaluation of the kwacha would be inflational and would hurt the poor as prices of essential goods would go up. He vowed not to devaluate the exchange rate.
MalawiÃ¢â‚¬â„¢s foreign exchange inflows are seasonal. During April-September, there is usually enough supply of foreign exchange from mainly tobacco exports. The lean period is between September-March when the Reserve Bank becomes the sole supplier of dollars which come from the countryÃ¢â‚¬â„¢s development partners.
The forex crunch has worsened because of low tobacco earnings and after key donors, including Britain, withheld budget support which has left the country teetering on the brink of collapse with massive fuel and forex shortages.
The situation has made it so difficult for the country to import essential commodities like drugs, fertilisers and fuel.