The kwacha depreciation and frequent changes in fuel prices may be here to stay, at least for another two years as the twin issues are non-negotiable under the three-year Extended Credit Facility (ECF) deal government signed with the IMF, Weekend Nation has established.
A source privy to the ECF discussions confirmed to Weekend Nation last week that despite the suffering the reforms have brought and the buyer’s remorse at the Reserve Bank of Malawi (RBM), Ministry of Finance and State House, the administration is boxed into the deal and cannot come out of this without serious consequences to the foreign aid budget.
Finance Minister Ken Lipenga, in a written response to a questionnaire, explained that it is Malawi that embarked on this policy reform path, not the IMF, and that it will be imprudent to retreat.
Last July, the Joyce Banda administration negotiated with the International Monetary Fund (IMF) a new package of policy reforms under ECF to reopen aid taps, restore investor confidence and boost Malawi’s standing in the global financial system after the Bingu wa Mutharika administration refused to reform the exchange rate policy as agreed in the fund-supported programme.
The total package from the fund to help government implement reforms contained in the ECF over the next three years from July 2012 is $156.2 million (about K62.5 billion).
As part of these reforms, the Banda administration liberalised the local currency, the kwacha—releasing it from a tight RBM grip—first, by effecting a 49 percent devaluation and, secondly, immediately floating it to have its value determined by market forces of demand and supply.
That move resulted in the kwacha losing around 140 percent of its value from K167 in May 2012 to slightly over K400 today.
Another centrepiece of the ECF was the reintroduction of the automatic fuel pricing mechanism which has also left pricing to market devices. This decision has resulted in the near doubling of fuel prices from around K360 to over K700. Water and electricity tariffs have also been liberalised.
So far, the IMF has carried out three performance reviews of the programme and declared Malawi’s reforms on track.
In the latest review last week, IMF described as “commendable” government’s implementation of the economic programme and released $19.6 million (K7.8 billion), bringing total disbursements under the current programme to $58.7 million (K23.5 billion).
But a source that was privy to the ECF discussions told Weekend Nation recently that devaluation of the magnitude that Malawi implemented last May also shocked some senior officials at IMF headquarters who wondered if it were not possible for Malawi to phase the currency softening.
“Some of the toughest conditions which government accepted to get back the IMF programme were that there would be no controls on the kwacha and fuel pricing and that is why the floatation and automatic pricing mechanism systems were adopted,” said the source.
“Unfortunately, although it has become clear that these two systems have brought a lot of suffering among Malawians, government cannot single-handedly decide to abandon them. Government cannot make any alterations to the signed agreement unless with approval from IMF,” he said.
Last Wednesday, Lipenga said government undertook the reforms considering the troubling economic factors at the time such as forex and fuel scarcity.
He said realising that the reforms to stabilise the economy would bring some pain to Malawians, government, with the support of development partners, scaled up social protection programmes for the most vulnerable in the communities.
Said Lipenga: “The reforms were done to correct the macroeconomic imbalances that were there. They were not impositions. Given the corner that we found ourselves in, including the fact that no development partner, not a single one, was prepared to consider giving us budget support unless we addressed certain urgent issues, including those of governance, our options were extremely limited.
“The aim of government is to achieve stability in the exchange rate through market forces. Fixing prices only leads to price distortions in the market. By fixing prices and pegging the currency, you create an artificial stability which is not sustainable and as a country, we are now fully aware of the dangers of keeping prices below their true market value,” he said.
Former Minister of Economic Planning and Development Atupele Muluzi said President Banda inherited a difficult state of affairs and her administration has had to make some tough decisions to recover the economy.
But the Consumers Association of Malawi (Cama), which has been in the forefront calling on government to abandon floatation and automatic fuel pricing mechanism, said this week the major problem was the Executive simultaneously implemented the two policies.
Said Cama executive director John Kapito: “Our argument has been and will continue to be that government should not implement the two reforms of devaluation and floatation at the same time since that is a wrong sequencing of reforms and implementing them simultaneously has devastating effects on fragile economies such as Malawi.”
Kapito said the 49 percent devaluation should have been phased to allow the economy to adjust.