International Monetary Fund (IMF) has called on Malawi to abandon the fixed exchange rate and instead adopt a flexible, market-driven, warning that the current regime is fuelling inflation, draining reserves and stalling recovery.
In its latest Article IV consultation statement on Wednesday, the IMF said policy delays have eroded initial gains and exposed the economy to deeper vulnerabilities.
Reads the statement: “Malawi is at a critical juncture facing high inflation, an unsustainable fiscal and debt outlook, foreign exchange shortages, and fuel scarcity.
Amid significant downside risks, decisive and urgent policy action is required.”
At the heart of the IMF’s concerns is continued use of a fixed exchange rate regime, warning that the policy has reversed the benefits of the 44 percent currency realignment effected in November 2023.
“A more flexible, market-determined rate would bolster macroeconomic stability and enable the economy to absorb shocks while rebuilding foreign reserves,” the IMF said.
Despite mounting macroeconomic concerns and the lapse of the four-year Extended Credit Facility, Ministry of Finance and Economic Affairs spokesperson Williams Banda said its developmental State approach is the best route to sustainable growth.
He said: “Malawi is a poor country and has decided that it will take a developmental State philosophy.
“Taking resources into non-productive sectors cannot transform Malawi.”
Economics Association of Malawi president Bertha Bangara-Chikadza is quoted as having said that the government should look beyond production-led recovery and pursue structural reforms that can close the fiscal gap and build resilience.
Malawi’s four-year $175 million (about K306 billion) ECF programme automatically terminated on May 14 this year.
