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IMF or not, we would have done it, Reserve Bank of Malawi says

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Wilson Banda

Reserve Bank of Malawi (RBM) Governor Wilson Banda has said the 25 percent devaluation of the local unit, the Malawi Kwacha, was not influenced by the International Monetary Fund (IMF).

Rather, he said, it has been done in reaction to market trends and with the intention to give the unit its true value.

Banda’s comment is a reaction to popular opinion which suggests that the Reserve Bank has taken the move as part of a desperate attempt by the government to secure a new IMF Extended Credit Facility (ECF) programme in place to help cushion Malawi from the prevailing economic woes.

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The central bank announced the devaluation on Thursday night while an IMF mission team is meeting government officials for a possible fresh ECF.

To have the programme in place, which could enable Malawi rebuild its Balance of Payment position, it would be required of the government to, among other things, adjust its economic policies, which include monetary policies such as the exchange rate, experts say.

But addressing journalists Friday in Blantyre, Banda maintained that the central bank did not act under any duress but the decision to devalue the Kwacha was in correlation with economic trends.

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He said the move has been arrived at to address existing forex supply and demand imbalances which have been prevalent in the domestic foreign exchange market. The Reserve Bank expects that the forex held on the parallel market would trickle into the authorised dealer banks (ADBs) to lessen the pressure.

“It is a decision we have taken as the central bank looking at economic trends. With or without the IMF, we could still have taken the move. The measures taken are enough to correct the challenges. It is drastic but necessary,” Banda said.

The economy has in recent past been crippled by low foreign exchange supply, declining official reserves and widening spread of rates between the ADBs and the black market.

But the Kwacha devaluation is feared to likely trigger run-away inflation—already at 14.7 percent in April 2022—and lead to further rise in cost of living.

This would put pressure on the majority of Malawians whose buying power has also been dwindling lately.

Economists forewarned that the government needed to exercise caution before moving to devalue the local currency, saying that without adequate reserves for essential imports, disaster emanating from run-away inflation is looming.

“In Malawi, make no mistake, the exchange rate, not interest rate, remains most important determinant of inflation—the central bank knows this too well and needs to treat it very carefully always,” reads a paper issued on Thursday by economists Thomas Munthali, who is also National Planning Commission Director General, and Frank Ngalande.

But Banda said the central bank will continue implementing tight monetary policy while expecting the Treasury to also adopt a tighter fiscal policy stance in an attempt to contain possible pressure emanating from the Kwacha devaluation.

In an interview yesterday, Minister of Finance Sosten Gwengwe said already, the Treasury has moved to adopt some yet-to-be announced tighter monetary policies and measures.

“We are also moving so fast in looking at containment measures, especially on public spending. That means we will have a very tight fiscal regime. We are taking measures that, when the economy stabilises, then we should be able to see stability of prices, interest rates and the rest of the macroeconomic indicators be moving towards the right direction,” Gwengwe said.

Economics Association of Malawi Executive Director Frank Chikuta said the country was in a situation where corrective measures, including devaluation, were inevitable, despite the possible pain it would cause.

“Yes, we need to make adjustments and we need to make them now because delaying means that we will have to make a huge adjustment in future which means it is going to be more painful than if we were to make the adjustment now,” he said.

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