A statement issued by the central bank on Thursday evening says the decision has been made because interim measures to control the situation have not been effective.

These include interventions in the foreign exchange market to support importation of strategic goods and avoid volatility of the exchange rate and temporary re-introduction of mandatory sale of 30% of export proceeds to the central bank within two working days.

“These measures have done little to curb the arbitrage trading by international brokers and banks and inadvertently led to further declines in foreign currency supply in the market,” said governor Dr. Wilson Banda.

He adds: “In order to curb the practice and dissuade hoarders of foreign currency from this practice, the Bank is informing ADB [Authorised Dealer Banks] to adjust by 25% from the midrate from 27th May 2022.”

Dr. Banda admits the devaluation will likely have a negative impact on the economy, but says the RBM will continue monitoring the situation to ensure speculation does not worsen the value of the kwacha.

The Bank will aim to become a net buyer of foreign exchange in the market in order to increase official reserves, he says, adding that the procedures for the bank’s purchases will be announced later.

RBM says it will maintain the requirement for tobacco earnings and other proceeds to be surrendered to it for a short term.

Sales of tobacco, the country’s main forex earner, are underway but have done little to improve the availability of the US dollar.

The kwacha has been trading at an average K850 against the US dollar which means it will now roughly be trading at above K1000.

Covid-19, the Russia-Ukraine war and the recent cyclones Ana and Gombe have been cited as the key factors putting pressure on the kwacha.

Earlier, economist Dr Thomas Munthali cautioned the government to trade carefully on plans to devalue the local currency, warning it would do more harm than good to the economy.

He was reacting to negotiations that the government is holding with an International Monetary Fund (IMF) Mission on the Extended Credit Facility (ECF) aimed at bringing back the economy on track.

He said, contrary to what other economists might suggest in times of forex shortage like this, devaluing the kwacha would bring a new wave of highly-devastating inflation.

In the last several months, shortage of forex has led to scarcity of essential commodities including medical drugs and cooking oil. It also forced Ethiopian Airlines to stop ticket sales through its local agents.

President Lazarus Chakwera is on record as saying resumption of IMF’s support would bring back donor confidence in the country, and that the expected credit funding would help balance forex reserves.