Malawi group fear worse economy as EU threatens

Economics Association of Malawi  (Ecama) has said government risks plunging the country into an abyss if it does not quickly negotiate and agree to a win-win programme with the IMF.

This is coming at a time when forex supply is short in the country and European Union coming out of its shell to say Malawi risks losing more of EU’s support this year than the 100 million euros (about K21.4 billion or $210 million) it forfeited last year if it fails to revert to the suspended IMF programme.

In a report by its technical team last month, IMF called on Malawi devalue the local currency, kwacha, to between K230 and K250 against the dollar as a measure of managing the never ending forex shortages
and stifle the country’s now influential black market.

Alexander BaumEU head of delegation: Warns to pull the plug

But President Bingu wa Mutharika has strongly said he wont the let go the kwacha, arguing doing so without any guarantee of safety nets or a cushion would severely hurt poor people and the economy in general.

Ecama vice president Edward Chilima said in a statement, the group’s view is that devaluation on its own does not solve forex supply problems in the medium to long term especially with low elasticity of
export supply.

“Devaluation will not increase supply of forex except to unlock suspended aid. Thus a sustainable and growth inducing response to the current crisis is to look for quick ways to generate forex in 12 to 24
months,” said Chilima.

He said Ecama recommends a managed devaluation that can be agreed by government and IMF through a programme that must contain safety nets to cushion the poor from escalating commodity prices.

“Above all we recommend intervention and deliberate policies by Malawi to stimulate export production in areas such as cotton, groundnuts, gemstones and other agricultural export crops inorder to improve the supply side of foreign exchange,” Chilima said.

Minister of Finance and Development Planning Ken Lipenga commended Ecama for addressing government on the matter but said discussions with the IMF were ongoing to have a programme as soon as yesterday.

On EU, its Ambassador Alexander Baum said the union disbursed 52.2 million euros (about K11.1 billion) to Malawi under various programmes during 2011 and entered into new commitments of 55.2 million euros (about K11.8 billion).

This he said was down by 100 million euros in grant money compared to the previous year 2010 when the EU disbursed 154 million euros and entered into new financial commitments for 146 million euros.

He said budget support operations have been put on hold as the EU is unable to implement this type of programmes under the government’s current economic policies in the absence of an agreement with the IMF.

Budgetary support to Malawi from donors is over 40 percent and this year they are holding back over $500 million since Malawi’s programme with the IMF went off track.

Baum said resumption of general budget support will require the agreement from EU member states in the European Development Fund (EDF) committee and will take into account Malawi’s current governance situation.

Lipenga said government is aware about last year’s drop in EU support and the potential of losing more if governance concerns are not addressed and economic policies not improved.

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