Former president Bingu wa Mutharika, who died suddenly in April 2012, had resisted calls by the International Monetary Fund (IMF) to devalue the Malawian kwacha as a way to boost exports, arguing that it would cause too much suffering to the poor. The kwacha remained pegged to the US dollar at a rate of 166, creating a parallel informal market in which the dollar was sold at more than 300 kwacha, draining foreign currency from the formal banking system.
Mutharika’s refusal to meet the IMF’s demands and concerns about his increasingly autocratic style of governance resulted in a significant loss of donor support that at one time had accounted for 40 percent of the country's budget, and helped to push Malawi towards financial collapse.
Malawi’s new president, Joyce Banda, has moved quickly to restore relations with donors, in part by meeting the IMF’s conditions for a support package. On 7 May, she devalued the kwacha by nearly 50 percent and untied the currency from the dollar.
In a statement by the Reserve Bank of Malawi on the same day, Governor Charles Chuka said the move was intended not only to improve the availability of forex and unlock donor flows, but also to reduce demand for imported consumer goods in favour of domestically produced goods. He noted that since the prices of most commodities already reflected the parallel market exchange rate, devaluation was not expected to trigger further price increases.
However, the prices of many basic items have gone up by as much as 50 percent and fuel prices have risen by 30 percent, pushing up the cost of public transport by about 40 percent.
“The impression I had was that things will come out much better [after the devaluation], but prices for every commodity are going up now,” said Rhoderick Limula, an informal trader from Blantyre, the country’s commercial capital. Economic survival has become more uncertain than ever, he told IRIN, adding that with the new prices he could no longer keep his business going and would have to give it up.
A necessary evil
The Chief Executive of the Consumer Association of Malawi, John Kapito, pointed out that Malawi is a landlocked country and heavily dependent on imports, so any weakness in the kwacha was bound to have negative consequences for consumers, but that devaluation was a necessary evil.
“This was an economic reform that Malawi could have introduced some time back, but we decided to hold out and dictate an exchange rate that did not reflect our economic performance,” he said. “I believe this decision was going to be made by anyone in government if we wished well for Malawi in the medium and long term.”
Kapito added that the government needed to rapidly implement mechanisms such as salary increases to cushion vulnerable Malawians from the short-term effects of devaluation.
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Donors come back
The government has yet to announce any such measures, but donors have responded with renewed pledges of support. World Bank Country Representative Sandra Bloemenkamp told IRIN that the Bank was working on a package to help the country’s poor cope with the effects of devaluation.
Britain has also agreed to unlock aid frozen in 2011 following a diplomatic spat with Mutharika. The UK’s International Department for International Development (DFID) pledged to release an initial £30 million (US$47.3 million) tranche of urgent funding, £10 million ($15.8 million) of which will be used to support Malawi’s ailing healthcare system, while the remainder will go towards stabilizing the economy.
But until aid money starts flowing again and the economy settles down, ordinary Malawians will have to absorb increases in the cost of living.
President Banda opens the 2012/13 budget session of parliament on 18 May, when she is expected to outline the government’s approach to economic recovery.
This article was produced by IRIN News while it was part of the United Nations Office for the Coordination of Humanitarian Affairs. Please send queries on copyright or liability to the UN. For more information: https://shop.un.org/rights-permissions