Lilongwe: The International Monetary Fund (IMF) has blamed Malawi's current economic problems on foreign exchange controls introduced by government over the years. It has since recommended the liberalisation of the forex market and substantial devaluation as one way of addressing the situation. The IMF has also advised Malawi to regularise relations with donors and other funders to reinstate foreign exchange funding support to government.
Finance Minister Ken Lipenga and IMF resident representative Ruby Randall told Business Times last week that discussions between Malawi and the IMF would continue as the two parties explore ways of resuscitating the country's programme with the fund.
In a confidential report to government sourced by Business Times, the IMF Technical Assistance Mission said loose monetary and fiscal policies have also exacerbated the situation.
"Malawi's official exchange rate remains overvalued, causing a persistent imbalance in the foreign exchange market," observes the report, adding: "Currently, the parallel market is at about K250 to US$1, compared with the current official exchange rate of about K166 to US$1."
It says an overvalued exchange rate, in turn, has led to foreign exchange market rationing and multiple exchange rates, which remain key deterrents to private sector activity, growth, and diversification.
"Recently, reduced aid inflows and an exceptionally poor tobacco market have exacerbated the shortage of foreign exchange" reads the IMF report in part.
The mission has since recommended a fast but staged liberalisation of the current regime and other formulated monetary and fiscal reforms.
"The authorities were advised to immediately start implementing tight monetary and fiscal policies and reduce the liquidity overhang, created in July-October, through issuing short- and long-term instruments," said IMF in the report, adding: "This should be followed by a large devaluation."
It also recommends operation of a freely floating exchange regime, removal of restrictions on forex bureau rates, and setting the official rate with reference to traded markets.
It says the measures should be followed, in a short period after devaluation, by lifting remaining restrictions on forex transactions, including the surrender requirement.
The fund observes that Malawi continues to have a severe shortage of foreign exchange in the context of an overvalued official exchange rate and tight administrative regulations designed to force economic agents to trade at these levels.
The administrative measures are increasingly difficult to implement and a significant share of trade has moved to the parallel market, says the IMF.
It believes that the current foreign exchange management policy not only hurts exporters, but also production and employment in general, as the chronic forex shortage has led to reduced imports of raw materials, fuel, spare parts, and other critical imports.
"Anecdotal evidence suggests that market players try to avoid these restrictions through under-invoicing, barter trade, side payments, and other similar activities," says the IMF in the report.
The IMF also observes that government generally acknowledges the need to move to a liberalized exchange regime, but prefer to move gradually and guide market prices through mechanism such as an exchange rate band.
However, the report says the IMF mission's argument is that low levels of reserves, the damage made to the credibility of the authorities by the loose macroeconomic policies, and the authorities' track record in the area of the forex regime have rendered any peg-like regime such as a band not credible at the moment.
The fund says Malawi's macroeconomic environment has significantly worsened during July-October 2011, as central bank funding has been used to finance the budget in the face of declining donor inflows and a pause in IMF programme support.
