The European Union (EU) has backed Thursday’s devaluation of the kwacha, saying it will position Malawi to unlock funds from donors upon securing the Extended Credit Facility (ECF) from the International Monetary Fund (IMF).
In an exclusive interview with The Nation yesterday, EU Ambassador Rune Skinnebach said the 44 percent devaluation would create some hardships in the short-term, but stressed that it was a necessary measure to unlock the external financing Malawi desperately needs.
He said: “The devaluation is tough medicine, but it was necessary. Securing an ECF programme will signal to other development partners that Malawi is committed to structural reforms to promote economic stability.
“The EU is going to front-load about €60 million before the end of the year to inject some forex in the local economy. Later on, the EU plans to resume direct budget support. We are planning to disburse €54 million to the education sector.”
In an earlier statement, IMF Africa Department deputy division chief Mika Saito said the Malawi Government pledged to implement external sector policies that focus on rebuilding official international reserves and facilitating a market-determined exchange rate.
But some local economic experts have cautioned that exchange-rate pass through effects and the rising costs of imports would pose some inflationary pressures on the local economy.
However, Skinnebach allayed the concerns, saying the local market has already adjusted to the informal exchange rate because most importers were accessing the forex on the black market rate.
He stressed that government should start implementing some structural changes to ensure that Malawi does not regress in the medium to long-term.
Said Skinnebach: “We have to find ways of ensuring that we can boost our local exports and find ways of substituting some imports with locally-manufactured products.
“The government will also have to ensure fiscal discipline. It has to be prudent with the way it is using its resources. I know it will be hard now considering that we are heading into an election period where the public will be expecting politicians to be generous. But it will have to be done to maintain this new course.”
During a press briefing at Bingu International Convention Centre in Lilongwe earlier yesterday, Minister of Finance and Economic Affair Simplex Chithyola Banda said the devaluation was long overdue to protect the forex market considering that gross official reserves–the amount of forex under the direct control of the central bank–had been substantially low.
He said: “The Reserve Bank was having to spend too many of our foreign reserves just to sustain the low exchange rate, which was becoming unsustainable in the wake of US dollar shortages. As a result, importing strategic commodities that boost production, such as fuel and fertiliser, was a challenge.”
The central bank devalued the kwacha five months after the Economic Intelligence Unit, a research and analysis division of the Economist Group of the United Kingdom, forecast that the Reserve Bank of Malawi would devalue the kwacha by 20 percent at the end of July.
In its Malawi Economic Monitor released in July, the World Bank also urged local policy makers to bring down the value of the kwacha, which it says, remains “overvalued despite the continued decline of foreign exchange reserves”.