Malawi: Mutharika Defies IMF On Devaluation

President Bingu wa Mutharika appears to have set his face against demands by the International Monetary Fund (IMF) to further devalue the country’s currency, the Malawi kwacha (MK), in order to reduce the price of exports and the shortage of foreign exchange.

Malawi is battling severe fuel and foreign exchange shortages, in a country where 39% of the 15m population live on less than $2 a day. The Malawi kwacha had been officially trading at MK165 to $1 following its last devaluation by 10% in August 2011, following pressure from the IMF.

However, IMF authorities had been arguing that the 10% devaluation was minimal and pushed for further devaluation to MK250 to $1 to bring it into line with the flourishing parallel market, which had been pegging the kwacha at between MK250 and MK300 to $1.

The recommendation was part of an IMF conditionality that would enable Malawi to win back the country’s three-year Extended Credit Facility (ECF) arrangements, which the IMF suspended last year over what they called failure by the government of Malawi to adhere to conditions attached to the fund.

The IMF mission chief to Malawi, Janet Stotsky, had urged the government authorities to quickly make significant adjustments in their macro and micro economic policies that would lead to the resumption of the programme.

In their December report Liberalisation of the Foreign Exchange Regime for Current Account Transactions and Exchange Rate Flexibility, issued after a week-long fact-finding mission on Malawi’s economic management, the IMF mission had observed that Malawi’s overvalued exchange rate was causing persistent imbalance on the exchange rate market.

“An overvalued exchange rate has in turn led to foreign-exchange market rationing and multiple exchange rates, which remain key deterrents to private sector activity, growth and diversification,” reads the report in part. The report had also cited the recent reduced aid flows and an exceptionally poor tobacco market as some of the issues that had exacerbated the acute shortage of foreign exchange in the country.

Colonial thinking?

Malawi started to experience a reduction in aid flow in 2011 soon after President Mutharika’s government expelled British envoy Fergus Cochrane-Dyet over his leaked cable to London, in which he accused Mutharika and his government of being self-centred and arrogant.

The suspension of Malawi’s ECF programme in mid 2011 had also led to most donors withholding their budgetary support, which had accounted for 40% of the national budget.

However, Mutharika had maintained that his administration would never devalue the kwacha, arguing that doing so would further hurt consumers in the country as prices of commodities and services would go up. He chided some local economists who were backing devaluation, saying they were “thinking like colonialists”.

Mutharika said devaluing the currency further would invite national economic depression and that he would not buy economic orthodoxies that would hurt Malawians. The President said he had maintained a stable kwacha in his rule.

Mutharika pointed out that when former President Bakili Muluzi took over government from the one-party regime of the Malawi’s first President, Kamuzu Banda, in 1994, the kwacha was around MK54 to $1, and when Muluzi had handed over power to him in 2004, the currency was valued at MK150 to $1.

Economic commentators have been attributing the overvalued kwacha to the current forex shortages the country is experiencing. But Mutharika had said the persistent forex shortage problems were largely because of foreign investors who were externalising money and opening offshore accounts rather than banking locally.

He singled out international chain stores like Shoprite, Game Stores and Mr Price and some banks he did not name, as investors that have caused the forex shortage, which has subsequently led to the current fuel crisis.

“Today we are seeing Shoprite, Spur, Game Stores and Mr Price coming to Malawi to start business and yet they don’t have accounts here,” Mutharika said.

“And yet you keep on asking where the dollars are – they are offshore with these people in their banks,” he said. Officials of the chain stores declined to comment on the accusations.

“When the tobacco buyers buy our leaf, they don’t keep their money here when they resell. People are saying I am arrogant for not going to the donors to plead for assistance and yet these people do not understand our problems,” said Mutharika. “Your money is in Mumbai, Karachi and London: they just give you peanuts for your tobacco, sugar, tea.”

He had decreed that the Reserve Bank of Malawi and the Ministry of Trade must not “allow foreigners or anyone else to open a bank or business here unless they tell us where our forex is going. I want you to be in control of forex to protect this country and not the IMF. I will be happy to receive your resignation letter if you are not ready to protect this country,” he said.

Opinions divided

Local economists are divided, with some arguing that devaluing the local currency would help solve foreign exchange shortage as people would be forced to shun the black market, whose rates are higher than those of commercial banks.

Chief executive officer of the Malawi Confederation of Chambers of Commerce and industry, Chancellor Kaferapanjira, has said the strong kwacha has been hurting the economy by making Malawi’s exports more expensive for foreign customers and also creating a shortage of forex.

But economics lecturer at Blantyre International University, Professor Charles Chanthunya, doesn’t see devaluation is a problem to the forex shortages: “The problem is the exchange control regime … These are things that are highly contributing to the scarcity of forex in the country because no investor would prefer investing in a country with tight exchange controls.” He said many people in the diaspora are not opening accounts with Malawian banks due to exchange controls that make it difficult for them to withdraw their money. “The exchange controls were best in the 1960s and not in 2011. I always wonder why Malawi is sticking to them while many countries are abolishing them. ”

Chanthunya, however, said devaluation will still take place sooner or later, although it would push up prices for various commodities and services.

“The problem is that donors cannot give aid to a country that resists calls by the IMF. It is obvious that Malawi will abide by the IMF calls because failing to abide by the recommendation will mean more suffering to Malawians as donor aid will not flow into the country,” he said.

Reserve Bank director of governance Ralph Tseka said the Ministry of Finance was still weighing what options to take.