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IMF hints at Kwacha devaluation

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ISSUED STATEMENT— Li

The International Monetary Fund (IMF) has said the Kwacha remains misaligned with some of the country’s major trading currencies, notably the United States (US) Dollar, the Great British Pound, the Euro and the South African Rand.

This is despite that Capital Hill effected a 25 percent devaluation of the local currency in May this year, a development that saw the Kwacha slumping from around K840 to the US Dollar to K1,031 to the green buck.

In a statement on Monday, after the IMF Board nodded to Malawi’s Rapid Credit Facility (RCF) financing, IMF Deputy Managing Director Bo Li said Malawi is facing a challenging economic and humanitarian situation, with foreign exchange rate misalignment leading to a sharp decline in imports including fuel, fertiliser, medicine and food. exchange shortages and an

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He said the IMF expects the emergency financial assistance under the RCF’s new Food Shock Window to help address urgent balance of payment needs and mitigate the impact of the food shock.

Addressing reporters in Lilongwe Tuesday, IMF Country Manager for Malawi Farai Gwenhamo said, as stated in the statement, the assessment of the fund is that there is that misalignment in the foreign exchange.

“But, like I said, we cannot speak beyond that except to say that in the context of the programme there is commitment from authorities to ensure that there is alignment in the external sector, which covers the foreign exchange market.

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“I think, at this stage, this is what I can speak [as regards] to the high level commitment. In terms of how exactly this is going to be achieved, I think these are the details that will come about as we continue with implementation of the programme. I think it’s too early to make comments about that,” Gwenhamo said.

As at noon Tuesday, the Kwacha was trading at K1,450 to the US Dollar in forex bureaux and K1,500 on the black market.

According to the IMF, the 12-month Staff-Monitored Programme and Programme Monitoring with Board (PMB) involvement, which was approved by IMF management on November 11, would help the authorities establish a track record of policy implementation, possibly paving the way for IMF-supported upper credit tranche (UCT) programmes such as the Extended Credit Facility (ECF).

Asked as to whether Malawi could still push for the ECF programme after securing the PMB, Gwenhamo said authorities have, at any point in time, the right to switch from the PMB to UCT programmes such as ECF, if conditions permit.

“So, there are no strict rules as to when that transition could happen. Of course, it depends on our engagement with the authorities and progress that is being made on the implementation of the PMB,” Gwenhamo said.

According to IMF Board, moving forward, fiscal discipline— supported by a realistic budget, an enhanced public financial management system and timely production of comprehensive fiscal reports— is important.

The board added that restoring price stability and ensuring financial sector stability will help build a foundation for private sector-led growth.

“Rebuilding external buffers will be critically important to reduce Malawi’s vulnerabilities to external shocks.

“The RBM’s commitment to rebuild its foreign exchange reserves, requiring implementation of its strategy to wind down unsustainable policies, including excessive use of swaps and trade credit to maintain strategic imports and other quasi-fiscal operations, is welcome,” Li said.

Finance Minister Sosten Gwengwe recently rubbished claims from some quarters that Malawians should brace for another devaluation following the 25 percent currency depreciation in May.

“It is very saddening hearing from some other Malawians scaring the market and everyone else that there will be another devaluation. That is coming from people who don’t wish the country well.

“If they were people who are well enlightened and know what they are talking about, they should have referred to the Article IV Consultation that the IMF released in December 2021, which clearly said that the misalignment of the Kwacha was at 25 percent,” Gwengwe said.

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