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Africa
Malawi devalues currency by a third
Decision expected to help southern African nation overcome shortage of foreign currency needed to import fuel.
Last Modified: 08 May 2012 14:11
Shortage of foreign currency has left Malawi unable to import enough fuel to keep the nation running [Reuters]

Malawi has devalued its currency, kwacha, by a third, and it will no longer be pegged to the US dollar.

With Tuesday's decision, the African nation has met an important demand of the International Monetary Fund to fix its troubled economy.

"Following this devaluation, the kwacha is now fully liberalised," the Reserve Bank of Malawi said in a statement.

The central bank's notice of official exchange rates put one dollar at 250 kwacha, compared to 166 kwacha on Friday, a 33.598 per cent value drop.

On the black market, the US dollar has sold at more than 300 kwacha, a disparity that drove foreign currency out of the banking system and into the hands of informal dealers.

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

People lined up for days for a few litres of petrol, and goods for the domestic market were sold over the border to earn foreign currency.

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

The IMF has for months called for a devaluation to end a shortage of foreign currency that has left Malawi unable to import enough fuel to keep the nation running.

It suspended its programme with Malawi last year, for a credit of nearly $80m that should have cushioned foreign-exchange shortages.

Several key donors - including former colonial power Britain - also suspended aid to Malawi.

'Hurt the poor'

The late president, Bingu wa Mutharika, had fixed the exchange rate in 2005, and had steadfastly refused to make a major devaluation, which he argued would hurt the poor.

After Mutharika's sudden death last month, the new president, Joyce Banda, has moved quickly to restore relations with international lenders and donors.

Charles Chuka, central bank governor, who has been appointed by the new president, also announced a series of reforms to loosen controls on foreign currency.

"All forex restrictions announced last year in August on forex bureau have been suspended since this is now a free floating foreign exchange regime," Chuka said.

The bank said the devaluation of the kwacha was further expected to have the effect of reducing demand for imports of consumer goods in favour of domestically made products.

"Most importantly, it should also, together with the liberalisation of 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," it said.

Source:
Agencies
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