IMF to offer assurances to unlock aid for Malawi

Reuters News
Posted: May 08, 2012 2:47 PM
IMF to offer assurances to unlock aid for Malawi

By Mabvuto Banda

LILONGWE (Reuters) - The IMF will send letters to Malawi's donor nations telling them it approves the country's efforts to seek financing so that they can release funds to help prop up its rapidly dwindling foreign exchange reserves, Malawi's finance minister said on Tuesday.

Malawi scrapped its currency peg to the dollar on Monday in a bid to unlock foreign aid and stop the downward spiral of its economy.

But the move triggered a devaluation of around 50 percent in its kwacha currency, and Malawi now only has enough foreign currency reserves to cover one month's imports, far less than the recommended three months, raising concerns the devaluation will hit companies and the poor if prices climb.

"The IMF has pledged to issue letters of comfort to help our development partners to support us immediately ... we have responded very quickly, and they are fast-tracking everything as well," Finance Minister Ken Lipenga told Reuters.

Malawi will need money within weeks to meet its import bills, which have jumped due to the kwacha devaluation, although the minister could not say exactly how much it needed.

"Our initial estimates were that we needed between $300 million and $500 million to allow us to devalue and have a certain critical mass of reserves, but those figures have been reviewed and may go up or down," Lipenga said.

Andrew Mwaba, the resident representative of the African Development Bank, confirmed the IMF move to offer letters of comfort - written approval of the country's efforts to seek financing - and said the World Bank and his bank were ready to act quickly.

"The IMF letters of comfort will allow us to intervene immediately, and so far the African Development Bank and the World Bank have indicated that we will expedite the release of funds," Mwaba said during the review meeting of donors and the government.

Mwaba said donors were happy that the new administration of President Joyce Banda was taking steps such as the devaluation and showing a commitment to addressing governance concerns raised with the previous regime.

Banda is trying to restore overseas aid cut off under her predecessor's rule that left a gaping hole in the budget, about 40 percent of which comes from foreign aid.

Banda said last week she had asked the African Union not to invite Sudanese President Omar Hassan al-Bashir to a summit of heads of states in her country in July because of the economic implications that his presence may have with Malawi's donors.

Former President Bingu wa Mutharika, who died last month, had allowed Bashir to attend a regional trade summit last year citing "brotherly coexistence", which was one reason why the United States suspended a $350 million energy grant.

The move further strained ties with most European nations, who had already frozen projects due to Mutharika's suspected human rights violations and increasing autocracy.

(Editing by Helen Nyambura-Mwaura and Hugh Lawson)