Nation Publications Limited

The 2010 African Economic Outlook report jointly prepared by the African Development Bank (AfDB), the Organisation for Economic Co-operation and Development (OECD) and the United Nations Economic Commission for Africa (Uneca) has faulted Malawi’s exchange rate policy adopted between 2006 and towards the late 2009.

The report, which provides an analysis of African economies and evidence-based policy advice on key development challenges facing the continent, said Malawi’s pursuit of a de facto fixed (pegged) exchange rate policy from 2006 to late 2009 made it difficult for the Reserve Bank of Malawi (RBM) to clear the foreign exchange market at the official exchange rate.

According to the report, RBM’s failure to clear the foreign exchange rate had triggered import demand backlogs and serious forex shortages, which negatively affected business operations in the economy as it choked importers.

Malawi’s foreign exchange reserves hit record low level of 0.6 months of import cover in 2009 against the internationally recommended minimum of three months, according to the report.

"The authorities have renewed their commitment to policy reform, announcing measures for exchange rate liberalisation and fiscal consolidation to help build foreign reserves," says the report.

Towards the end of last year, government through RBM loosened grip on the local currency, the kwacha, and adopted a "principle of flexibility" in managing the country’s exchange rate which has seen the kwacha hovering within a targeted zone and above the earlier K140 rate per dollar.

The adoption of the flexible exchange rate regime coincided with the visit by an International Monetary Fund (IMF) team from Washington DC which reviewed Malawi’s Exogenous Shocks Facility (ESF) programme and also initiated discussions on a new programme. This situation fuelled speculation that government has bowed down to IMF pressure to adopt the new regime.

Commenting on Malawi’s general macroeconomic performance, the report indicates that the economy’s performance has generally been consistent and strong although government’s commitment weakened as the country approached the 2009 presidential and parliamentary elections.

It says domestic revenue performance was robust at an estimated 29.8 percent of gross domestic product (GDP) in 2009/10, buoyed by recent institutional and administrative tax reforms.

"Increased households food security and falling poverty have complemented strong macroeconomic performance…overall, the well-being remains low but is improving, as measured by the United Nations (UN) Human Development Index (HDI) score of 0.493," says the report.