MMU Tower Controller reported adjacent Control Tower allowed a VFR aircraft to conflict with IFR traffic resulted in a NMAC.

Narrative

I was working Ground Control (GC); Clearance Delivery (CD); and Flight Data (FD). The Local Controller accepted an inbound on the ILS Runway 23 (Aircraft X). The Local Controller was issuing traffic for westbound departures off of CDW. Aircraft X was level at 2;000 until BINGG (FAF). CDW had 3 aircraft westbound tracking toward and just inside of BINGG. Aircraft Y departed CDW due westbound and climbed just inside of BINGG at 2;000. Traffic updates were continually given to Aircraft X reference Aircraft Y. The Local Controller was unable to descend Aircraft X due to other aircraft westbound around 1;500-1;700. Aircraft X reported the traffic in sight and descended to 1;700 in one radar sweep to avoid the traffic. From mine and the local controllers view it appeared the aircraft had about 100 feet of separation and less than 1/8th of a mile before Aircraft X maneuvered to avoid.Suggestion: CDW needs to actively restrict traffic westbound at or below 1;500 to avoid our IFR inbounds on the final approach course. Not just say it's on the ATIS and not provide positive control. This is providing a tremendous amount of workload on all the controllers at MMU. CDW should also receive refresher training on what positive control actually means. Something needs to be done before a serious incident happens.