Malawi devalues currency to revive economy
THE devaluation on May 7 and subsequent free floating of the Malawi kwacha was merely the first step in reviving the country’s economy.
The next step is to make sure donors resume the aid they had previously supplied to one of the world’s poorest nations.
Malawi previously received general budget support from a group of donors which consisted amongst others of former colonial power, the UK, as well as the African Development Bank, European Union, Germany, the International Monetary Fund (IMF), Norway and the World Bank.
The Malawi kwacha was devalued to a selling rate of 252.50 per US dollar on May 7 from a selling rate of 175 on May 4, according to the Reserve Bank of Malawi’s (RBM) website.
The devaluation was “needed to unlock donor funds in the next few months,” it added.
Malawi has faced a severe foreign exchange shortage for the past few months, which has resulted in goods such as and fertilisers.
The foreign exchange shortage was in part due to the policies of the late President Bingu wa Mutharika who had a fallout with major donors such as the UK. Mutharika died of a heart attack on April 5 and Vice-president Joyce Banda was sworn in as the new head of government on April 7.
She is busy mending relations with donors and previously indicated the devaluation shortages of imported petrol, medicine would be in the order of 40%.
At the conclusion of an IMF mission to Malawi in April, Tsidi Tsikata, mission chief for Malawi, said the severe foreign exchange shortage contributed to a marked slowdown in economic activity last year.
Tsikata added: “Real GDP growth slowed from an impressive average annual rate of 8.3% during 2007-10 to about 4.5% last year. Agriculture has been the main engine of growth, supported by the government’s farm input subsidy programme and good weather conditions.
One of the first consequences of the May 7 devaluation was retail fuel prices have risen. The petrol price rose to K490 per litre on May 11 from K380 per litre on May 4, while the diesel price increased to K475 per litre from K360.
Similar price increases of other imported goods are likely in the days ahead, which is why the RBM increased the bank rate on May 11 to 15% from 13%.
Further interest rate increases are also likely. – I-net Bridge