Lilongwe: Towards the end of November last year, Reserve Bank of Malawi (RBM) Governor Perks Ligoya raided the airwaves of Capital Radio and relayed information that caused a few intestines to roll. He said Malawi would have to effect another devaluation of the local currency to address the foreign exchange shortages prevailing in the country. "Some adjustment to the kwacha could be good," Ligoya told the privately owned radio in an interview.
His remarks ruffled a few feathers. He was speaking against the background of an earlier 10 percent devaluation of the local currency that had sent prices of basic commodities to the roof, beyond the reach of the majority of Malawians.
The 10 percent devaluation had been forced on President Bingu wa Mutharika by the most likely culprit, the International Monetary Fund (IMF), supported by other western donors.
The 'imperialists', as often described by the president, have been advocating for a relaxed exchange rate regime as a condition for Malawi's return to a programme with the IMF as well as resumption of other donor support to the country.
And to show that what Ligoya had said did not go down well with authorities, he immediately backtracked on this earlier statement.
He told another local radio station and The Daily Times newspaper a day later that government would not just devalue the kwacha without first securing enough foreign currency.
"Devaluing the kwacha without resources to defend it would send the exchange rate into levels where we can't catch it. That would be even more destructive to the economy. We will have to negotiate with donors first before considering devaluation," Ligoya was quoted as saying.
His somewhat contradictory statements sent the market wondering why the whole central bank governor would one day wake up and tell the nation energetically that devaluation was inevitable, only to swallow his pride and backtrack on this statement a day later that the country could not devalue the kwacha without adequate reserves.
Obviously there was something boiling up in the high offices of Capital Hill after his statement that devaluation was inevitable.
To understand Ligoya's change of tune better, let us examine the economic advice that IMF has given the Malawi government against what President Mutharika, an economist himself who once served as Secretary General of Comesa, strongly believes in.
An IMF mission visited Malawi in December last year to discuss with Malawi government officials on the possible ways to solve the current economic crisis.
At the end of that meeting, each side of the conference table could not come out clearly on what had transpired during the meeting; save for a diplomatic statement from IMF that the discussions were "successful".
However, a confidential document leaked from the IMF team reveals the wide gap in economic philosophies existing between the IMF and President Mutharika.
According to the IMF Technical Assistance to Malawi, the country's current economic problems are as a result of foreign exchange controls introduced by government over the years, and it recommends that the forex market be liberalised and the kwacha be devalued substantially.
The IMF strongly holds that Malawi's official exchange rate is overvalued.
"Malawi's official exchange rate remains overvalued, causing a persistent imbalance in the exchange market. Currently, the parallel market is at about K250 to US$1, compared with the current official exchange rate of about K166 to US$1," the IMF confidential report says.
IMF Resident Representative Ruby Randall said foreign exchange liberalisation must come as a package, including revising the budget so that it does not rely on central bank financing.
"This [the package] will require both maintaining strong revenue performance and cutting low priority expenditures, while at the same time preserving social spending and targeting assistance to the poor and needy through special programmes," said Randall.
The IMF advice has been supported by other players in the country's economy including the Common Approach to Budget Support (Cabs) group of donors, Malawi Confederation of Chambers of Commerce (MCCCI), the Economic Association of Malawi (Ecama) and the Bankers Association of Malawi.
"Cabs call for a swift restoration of macroeconomic stability and revival of the IMF Extended Credit Facility as a critical step towards the resumption of budget support," reads a statement issued by the group in December 2011.
MCCCI Chief Executive Chancellor Kaferapanjira told the Business Times earlier that delay in the devaluation of the kwacha has negatively affected private sector operations and many areas of economy in the country.
"We have not devalued our kwacha as we should for a long time, no wonder people have been importing goods that we don't really need," Kaferapanjira said.
He said there was an urgent need for Malawi to devalue its currency in order to address the foreign exchange and fuel shortages affecting the country as well as facilitate private sector development in the country.
However, these views are in sharp contrast to President Mutharika's long held argument about the strength of the kwacha and the causes of forex woes in the country.
Mutharika principally believes that forex problems in the country are as a result of unscrupulous investors who externalize forex to overseas accounts.
In his July 20, 2012 public lecture titled, 'Political Independence, National Sovereignty and Self Reliance', Mutharika avers that devaluation as propounded by IMF is fallacious and not the way to go for an economy like Malawi.
Mutharika's lecture was delivered as Malawians were protesting on the streets against economic ills of his government.
"First and foremost, the people of Malawi should know that devaluation has profound consequences on economic development and brings inflation, disequilibrium in the economic indicators and instability in the exchange rate systems. This is because speculators look for further devaluation for purely personal gains," Mutharika argues.
He vehemently disagrees that the Malawi kwacha is overvalued.
"They (IMF) need to tell us the correct or equilibrium value of our currency and also when the kwacha might be undervalued. To date, nobody, including the IMF, has provided a model that shows the equilibrium rate for the Malawi kwacha."
Mutharika also does not buy the IMF assertion that the devaluation of the kwacha is the "panacea for all problems."
He says that the argument for devaluation is weak and inconsistent with the realities on the ground.
"The IMF is oversimplifying a very complex issue. A country that relies in primary commodity exports does not increase its exports through devaluation.
"In Malawi, tobacco, cotton, tea, sugar and coffee are regulated by international commodity agreements and hence are nonresponsive to currency devaluation as a stimulant to export," argues Mutharika.
The sharp divide in opinion on forex matters between Mutharika and the IMF is also evident in the prescription drug that each of these two sides give to heal the current forex woes in the country.
While the IMF believes in liberalisation of the forex market, Mutharika actually believes in more or less the exact opposite, stricter controls of the forex markets.
Mutharika, according to his public lecture, believes there should be "one official exchange rate in Malawi fixed by the Reserve Bank of Malawi" and not the so-called "bureau rate". And indeed bureau rates were abolished in the country.
Another solution, Mutharika argues in his public lecture, is that "all proceeds from the sale of tobacco on the auction floors be channeled through the Reserve Bank of Malawi which will determine how to allocate the forex to authorized dealer banks."
Mutharika also propounds, among other things, for tighter and more stringent regulations governing the operations of forex bureau within the context of the laws of Malawi governing the operations and the externalisation of forex.
However, the IMF thinks differently. It says the current forex regime has had adverse effects on the private sector.
"In particular, the current regime 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," reads the confidential report in part.
This explains the IMF's recommends for a freely floating exchange rate regime, removal of restrictions on forex bureau rates and the setting of the official rate with reference to traded markets.
According to the IMF, Malawi Government officials "generally acknowledge" the need to move to a liberalised exchange regime, but prefer to move gradually and guide market prices through mechanisms such as an exchange rate band.
However, the IMF mission argues that low levels of the forex 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.
With that sharp divide between the IMF and Mutharika, it is yet to be seen whether the Malawi government will implement the prescription which the IMF provided.
So far, Mutharika has shown his clear disdain for the IMF recommendations and may not budge an inch, at least if both his July 20 public lecture and recent public speeches are anything to go by.
For instance, on December 29 last year, Mutharika attacked some economists for being brainwashed with detergent and thinking like colonialists.
Though he did not mention any names, looking at the preceding events, one would be forgiven for suspecting members of the government team that met with the IMF mission the month before.
Overall, there may not be any drastic change in foreign exchange policy and what we may get from this government in the near future is probably summed up in what President Mutharika said in his December 29 public speech.
He said: "I want those who are looking into issues of forex to have a principle to defend this country. Don't protect the IMF, but protect the people. If it's difficult for you to do so, just tell me that you won't manage to help the people and resign. I will be glad to receive your resignation."
Meanwhile, Malawians continue to suffer from increased commodity prices and cost of living resulting from the fuel and forex shortages and withheld donor support as government continues to tussle with the IMF and other donors on the correct management of the country foreign exchange regime.
