IMF diagnoses Malawi’s forex illness

The current foreign exchange situation in Malawi was triggered by a fall in tobacco earnings and donor aid inflows last year, the International Monetary Fund (IMF) has said.

An all important IMF Mission was in the country until Monday this week among other things, having economic intercourse with government officials on widespread illness the economy is suffering from.

“The current foreign exchange situation…. is symptomatic of Malawi’s weak balance of payments position. Over the years, persistent overvaluation of the Kwacha has contributed to growth in imports outpacing growth in exports, while official international reserves have remained at very low levels, thus rendering the economy highly vulnerable to external shocks,” said IMF’s Mission Chief Tsidi Tsikata in his exit summation of Malawi visit.

Reserve Bank of Malawi Governor Dr Perks Ligoya: IMF advises RBM to mop up excess liquidity

The team noticed that the authorities’ recent attempts to tighten restrictions on foreign currency transactions have created distortions which are boosting informal activity at the expense of the formal economy, with adverse consequences for official sources of foreign exchange and government revenues.

“Moreover, the official exchange rate is failing to anchor inflation expectations as a growing share of imports is being priced at the significantly depreciated parallel market exchange rate.

“Discussions focused on policies to address the foreign exchange crisis and create an environment conducive to the achievement of the main objective of the Malawi Growth and Development Strategy: poverty reduction through sustainable economic growth and infrastructure development,” he said.

The mission recommended a package of policies, including adoption of a flexible exchange rate regime (devaluation of the kwacha), in order to stem a slide toward output and export contraction and rising inflation.

It pointed to examples of a number of African countries (including Ghana, Tanzania and Uganda) where reforms cantered on liberalization of the exchange rate regime eliminated large premiums in the parallel exchange rate and reversed declines in output and exports.

“The mission emphasized the importance of appropriate fiscal and monetary policies for avoiding an inflation spiral. With an uncertain outlook for government revenues and mounting pressures for wage increases, the mission urged the authorities to base the 2012/13 budget on realistic estimates of revenues and grants, and to begin to identify lower priority expenditures that could be cut to make room for spending on social protection programs and growth promoting investments,” he said.

The mission recommended that the Reserve Bank of Malawi make more active use of interest rate policy to mop up excess liquidity in the financial system in order to improve the outlook for inflation.

“The (Malawi) authorities indicated that they are in the process of formulating a comprehensive package of measures to address Malawi’s economic challenges in a holistic manner, including measures to enhance income generating activities for the poor. They hoped that the package would provide a basis for re-engaging in program discussions with the IMF,” he said.

The mission assured the Malawian authorities that IMF staff stands ready to work with them and Malawi’s development partners, including the World Bank and the African Development Bank, in support of policies and reforms that would help achieve the goals of the Malawi Growth and Development Strategy.

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