Malawi devalues currency by 50%

[buhera]

LILONGWE, May 7 (Reuters) - Malawi scrapped its currency peg to the dollar on Monday, triggering a devaluation of around 50 percent in the kwacha as it sought to unblock frozen aid and halt a downward spiral in the economy of one of Africa's poorest states.

The central bank's move - welcomed by the market and one of the most dramatic since Joyce Banda took over as president last month - is also aimed at appeasing the International Monetary Fund, which suspended a $79 million aid programme due to a conflict with her predecessor Bingu wa Mutharika.

The IMF had called for a 50 percent devaluation of the kwacha, which commercial banks were selling on Monday at 250 to the dollar - well above the former peg at 165 and close to the black market rate of about 275.

The Reserve Bank of Malawi said it did not expect the currency reform to stoke inflation, because most commodities were already being traded at the unofficial exchange rate.

"At 250 per dollar the exchange rate is well adjusted," the Reserve Bank of Malawi said in a statement.

"It should also, together with the liberalisation of the foreign exchange market, contribute to government's efforts to reach early agreement with the IMF, which should lead to unlocking donor flows in the next few months."

Former colonial master Britain and major aid donor the United States froze aid packages worth nearly $1 billion to a country with an annual GDP of around $5.6 billion.

Dollars earned through tobacco sales, which usually account for 60 percent of Malawi's foreign currency revenue, can now go through commercial banks instead of through the central bank.

"All forex restrictions announced last year in August on forex bureau have been suspended since this is now a free floating foreign exchange regime," Charles Chuka, the central bank governor, told reporters.

He said the devaluation was met by higher sales for tobacco at auction.

The central bank also said it will allow international tourists to settle bills in any major currency.

HARD CASH CRUNCH

"It is very welcome and the playing fields have now been levelled," said Roy Daniels, head of trading for Africa at Rand Merchant Bank in Johannesburg.

"But like any field, it requires watering and to keep the importers from reverting back to buying dollars at the high rates of the offshore market, the central bank will have to allow export dollars to flow to the market along with supplying the market with dollars."

Mutharika, who died last month of a heart attack, had picked a damaging fight with donors, who suspended aid. He received international condemnation when his forces killed 20 civilians in anti-government protests in July, deepening Malawi's isolation.

Petrol, drugs and other items purchased abroad with hard cash grew scarce, with people lining up for days for a few litres of gasoline. Goods for the domestic market were sold over the border to earn foreign currency.

President Banda has wasted little time in trying to repair frayed ties with the international donor community.

Neighbouring Zambia donated 5 million litres of petrol to help her build support at home among Malawians who grew increasingly angry at having to queue for necessities under Mutharika.

"The economy will definitely experience some negative effects as a result of the (dollar) revaluation but overall its definitely positive," said Helen van der Horst, an economist at NKC in Cape Town.

"There's no way the country could have continued in the current state." (Additional reporting by Xola Potelwa in Johannesburg; Writing by Jon Herskovitz; Editing by John Stonestreet)

[owo9ja]

i knew the woman was a sellout

[Dhuks]

Things we do to appease

[juzme123]

Originally Posted by buhera

The central bank's move - welcomed by the market and one of the most dramatic since Joyce Banda took over as president last month - is also aimed at appeasing the International Monetary Fund, which suspended a $79 million aid programme due to a conflict with her predecessor Bingu wa Mutharika.

Dictating to her how to rule her country for $79 million dollars... peanuts

[Carver02]

Coming soon to many countries in the North ...not explicit devaluations, but devaluations against real goods (oil, gold, etc.).

[Rdokoye]

This woman is slow, why didn’t she just go to China like every other country in Africa is doing right now!

[xJamaax]

Originally Posted by Carver02

Coming soon to many countries in the North ...not explicit devaluations, but devaluations against real goods (oil, gold, etc.).

Coming soon?

I dont think it will happen as those countries are a bit smart when it comes to dealing with these shady "international" institutions.

[Carver02]

Originally Posted by xJamaax

Coming soon?

I dont think it will happen as those countries are a bit smart when it comes to dealing with these shady "international" institutions.

It's already happening. As I said, it's not explicit (since most Northern countries don't maintain currency pegs) but there is a deliberate devaluation of the US dollar, the euro, and the yen. And there was recently an explicit devaluation of the Swiss franc against the euro when the Swiss National Bank said they would artificially maintain a floor for the euro (vs the franc).

This is devaluation in action:

[Xusein]

Devaluation only works well if you actually make things. All this move does is increase inflation in Malawi. FAIL.

[Forza Kimono]

So is Malawi planning on becoming the China of Africa with regards to production and manufacturing? Otherwise this move is such a fail

[èđđeůx]

Either devalue the Kwacha to receive more aid for the cash-strapped government, or remain cashless and watch gov't funding in agriculture, health, education sectors and so on further plunge.

Both are horrible choices, but something has to be done. If Mutharika hadn't fucked up in his last term then Malawi wouldn't have to be in this situation. So I say give Banda some time to figure out if what she's doing will hurt Malawi in the long-term or just short-term.

[Carver02]

Originally Posted by èđđeůx

Either devalue the Kwacha to receive more aid for the cash-strapped government, or remain cashless and watch gov't funding in agriculture, health, education sectors and so on further plunge.

Both are horrible choices, but something has to be done. If Mutharika hadn't fucked up in his last term then Malawi wouldn't have to be in this situation. So I say give Banda some time to figure out if what she's doing will hurt Malawi in the long-term or just short-term.

You're putting too much blame on Mutharika. The reality is that weakness in the world economy affects everyone.

[Vakai]

Originally Posted by èđđeůx

Either devalue the Kwacha to receive more aid for the cash-strapped government, or remain cashless and watch gov't funding in agriculture, health, education sectors and so on further plunge.

Both are horrible choices, but something has to be done. If Mutharika hadn't fucked up in his last term then Malawi wouldn't have to be in this situation. So I say give Banda some time to figure out if what she's doing will hurt Malawi in the long-term or just short-term.

+1.

[buhera]

Eddeux is right, Malawi is a small country with bad terms of trade and relies on exporting primary commodities such as tobacco in particular. Their black market rate was previously at that level and my personal experience is that when a country has a dual market with such wide disparity it is likely that most people are ignoring the official rate. The country faces two choices, it either persists with an unrealistic rate that no one transacts or just recognize the black market rate that is most likely being used by businesses to price their products. It is ultimately a question of the country falling victim to its own internal structural problems when they have no recourse to external finances. South Africa already loaned them some money a few weeks back and they have to stabilize themselves before they go into a spiral.

[BUTEMBO21]

Originally Posted by Carver02

You're putting too much blame on Mutharika. The reality is that weakness in the world economy affects everyone.

Countries that produce next to nothing wont be affected by the big boys hard time. IMO.

[èđđeůx]

Originally Posted by Carver02

You're putting too much blame on Mutharika. The reality is that weakness in the world economy affects everyone.

I don't see how it'd affect Malawi much. Other than potentially losing some aid money due to governments tightening budgets in the wake of weak global economic growth, they wouldn't be too much affected. Like Butembo said, those who are largely irrelevant in the global economy won't be hurt much when it tumbles.

I don't think I'm putting too much blame on Mutharika. I mean who else is there to blame for the drastic turn Malawi took in his second term?