The International Monetary Fund (IMF) says it will be critical for Malawi to facilitate a market-clearing exchange rate on an ongoing basis as monetary authorities seek to ease foreign exchange scarcity in the country.
The position by the global lender is in response to a question on whether the exchange rate needs to be devalued again.
The Reserve Bank of Malawi (RBM) devalued the kwacha by 44 percent on November 9 and the local unit is now trading at K1 700 against the dollar in authorised dealer banks.
Reads the update in part: “The authorities’ recent devaluation should help clear the market and ease foreign exchange shortages. However, it will be important to facilitate a market-clearing exchange rate on an on-going basis.
“Macroeconomic stability will contribute to greater stability in the exchange rate. The Reserve Bank of Malawi is committed to taking measures to develop the foreign exchange market and its efforts will be supported by the technical assistance from the IMF.”
The IMF said while monetary policy will remain anchored on taming inflation rate currently at 26.9 percent by ensuring positive real interest rates, external sector policies will focus on rebuilding official international reserves, reducing shortages of foreign exchange and facilitating a market-determined exchange rate.
The position by the IMF follows last week’s 44 percent devaluation of the kwacha and its subsequent approval of the four-year $175 million (about K297.5 billion) Extended Credit Facility (ECF) for Malawi, with an immediate disbursement of $35 million (about K59.5 billion).
Following the devaluation, RBM gave permission to authorised dealer banks to freely negotiate exchange rates to trade with the clients and amongst themselves, notwithstanding any limitations previously in place.
The central bank also announced that it will be holding forex auctions, which it has been using for price discovery since January this year, every two weeks from the monthly cycle and that sales will take place only as necessary to address disorderly market conditions.
The measures were meant to strengthen the forex market.
In an interview yesterday, Financial Market Dealers Association president Leslie Fatch said the measures RBM has put in place will allow the rate to be more responsive and enable the rate to now adjust and respond to demand and supply forces.
He said: “Devaluation alone is not a solution to the problem. We need to ensure we allow the rate to find its equilibrium based on market forces.
“Further, there is more to the conversation besides the monetary policy interventions taken which we commend RBM for implementing despite the unpopularity of such decisions.”
RBM spokesperson Mark Lungu said that more flexibility will allow the exchange rate to be determined by the market, adding that the currency adjustment was done to correct the misalignment that resulted from supply shortages in the market.
The devaluation, which followed the imbalances and mismatch in the exchange rate in cash and telegraphic transfer, meant that effective November 9 2023, the kwacha was selling at K1 700 against the dollar in authorised dealer banks from K1 180.
However, Business News spot-check shows that on the parallel market, the kwacha has also moved upwards from an average of K1 900 to an about K2 400 against the dollar, further widening the gap.
RBM data shows that as of September 30 2023, foreign exchange reserves under the direct control of the central bank stood at $242.68 or 0.97 months of import cover.
Malawi needs $250 million monthly to meet its import requirements, translating to $3 million per annum against imports valued at $1 billion.