The Malawi Government has said it is concerned with how to stabilise the kwacha and has since described it as the most pressing and challenging policy so far.
In a letter of intent attached with a memorandum of economic and financial policies and technical understanding, addressed to International Monetary Fund (IMF), the Ministry of Finance and the Reserve Bank of Malawi (RBM) have confessed that stabilisation of the kwacha in order to avoid a depreciation-inflation spiral remains a big challenge
“Given the low level of international reserves, we intend to maintain a tight monetary policy stance and to exercise fiscal restraint.
We remain committed to a flexible exchange rate regime to allow the kwacha to adjust to domestic and international developments,” reads the document in part.
However, Minister of Finance Ken Lipenga, responding in an e-mail on Thursday, said government is not contemplating in tampering with macroeconomic fundamentals to arrive at a value of the kwacha which has no relation to the state of the economy
“As government, we must ensure that fiscal and monetary policies and operations are pursued in a manner that ensures that the kwacha is stable. The private sector needs to play their part by producing and exporting more which will generate foreign exchange.
“Inflows of donor resources to various projects and programmes are also an important ingredient to ensure macroeconomic balance which will ensure long term stability of the kwacha. It is a combination of all these factors which will be able to create an environment that will foster economic growth and development,” said Lipenga.
The kwacha has been on a downward spiral by more than 150 percent for a better part of the last 12 months, since the May 7 historical 49 percent devaluation. The kwacha has, however, stabilised in the last four weeks due to waning demand for foreign exchange and proceeds from tobacco.
Foreign exchange reserves have marginally improved amid tobacco sales to an equivalent of 1.26 months import cover by week ending May 3, but still way below the recommended three months.
In the IMF letter, government attributes the marked depreciation of the kwacha to clearance of private sector external payments arrears, perceptions in the market of continued scarcity of foreign exchange based on the low level of official international reserves, and weak performance of foreign currency-generating products such as tobacco and sugar.
After the adoption of the liberalised foreign exchange rate regime, inflation consequently shot through the roof. On a year-on-year basis, headline inflation has to date increased from 12.4 percent in April to 37.9 in February before easing to 36.4 in March due to both food and non-food components of the inflation basket.
RBM has, according to the recent minutes of the monetary policy committee meeting maintained both the LRR and the base lending rate at 15 percent and 25 percent respectively.