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Malawi devalues kwacha by 48%

May 07 2012 13:30 Reuters

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Lilongwe - Malawi scrapped its currency peg to the dollar on Monday, triggering a devaluation of around 50% in the kwacha as it sought to unblock frozen aid and halt a downward spiral in the economy of one of Africa’s poorest states.

The central bank’s move - welcomed by the market and one of the most dramatic since Joyce Banda took over as president last month - is also aimed at appeasing the International Monetary Fund, which suspended a $79m aid programme due to a conflict with her predecessor Bingu wa Mutharika.

The IMF had called for a 50% devaluation of the kwacha, which commercial banks were selling on Monday at 250 to the dollar - well above the former peg at 165 and close to the black market rate of about 275.

The Reserve Bank of Malawi said it did not expect the currency reform to stoke inflation, because most commodities were already being traded at the unofficial exchange rate.

“At 250 per dollar the exchange rate is well adjusted,” the Reserve Bank of Malawi said in a statement.

“It should also, together with the liberalisation of the foreign exchange market, contribute to government’s efforts to reach early agreement with the IMF, which should lead to unlocking donor flows in the next few months.”

Former colonial master Britain and major aid donor the United States froze aid packages worth nearly $1bn to a country with an annual GDP of around $5.6bn.

Dollars earned through tobacco sales, which usually account for 60% of Malawi’s foreign currency revenue, can now go through commercial banks instead of through the central bank.

“All forex restrictions announced last year in August on forex bureau have been suspended since this is now a free floating foreign exchange regime,” Charles Chuka, the central bank governor, told reporters.

He said the devaluation was met by higher sales for tobacco at auction.

The central bank also said it will allow international tourists to settle bills in any major currency.

Hard cash crunch

“It is very welcome and the playing fields have now been levelled,” said Roy Daniels, head of trading for Africa at Rand Merchant Bank in Johannesburg.

“But like any field, it requires watering and to keep the importers from reverting back to buying dollars at the high rates of the offshore market, the central bank will have to allow export dollars to flow to the market along with supplying the market with dollars.”

Mutharika, who died last month of a heart attack, had picked a damaging fight with donors, who suspended aid. He received international condemnation when his forces killed 20 civilians in anti-government protests in July, deepening Malawi’s isolation.

Petrol, drugs and other items purchased abroad with hard cash grew scarce, with people lining up for days for a few litres of gasoline. Goods for the domestic market were sold over the border to earn foreign currency.

President Banda has wasted little time in trying to repair frayed ties with the international donor community.

Neighbouring Zambia donated 5 million litres of petrol to help her build support at home among Malawians who grew increasingly angry at having to queue for necessities under Mutharika.

“The economy will definitely experience some negative effects as a result of the (dollar) revaluation but overall its definitely positive,” said Helen van der Horst, an economist at NKC in Cape Town.

“There’s no way the country could have continued in the current state.” 

imf  |  malawi  |  dollar
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