Nation Online

Kwacha depreciation to fuel inflation in 2013

The continued weakening of the local currency will likely heighten pressure on inflation in 2013 and consequently erode purchasing power among many, Nico Asset Managers Limited has warned.

“The weakening of the currency will also result in soaring inflation; hence, reducing disposable income and increasing the cost of capital as authorities increase interest rates to contain the rising inflation,” says Nico Asset Managers in its 2012 annual report.

Malawi’s year-on-year headline inflation rate as of December 2012 stands at 34.6 percent mainly driven by increases in both food and non-food inflation.

In Malawi, high Inflation is mainly influenced by high food prices as food alone contributes about 58.1 percent in the national inflation computation basket, the Consumer Price Index (CPI).

But economic analysts also contend that the 49 percent devaluation of the kwacha, fuel price hikes, electricity tariff adjustments and food scarcity have been the major factors affecting inflation in the year 2012.

Increased pressure on inflation in 2012 was despite the record three-time hike in the bank rate by the Reserve Bank of Malawi (RBM) within a space of six months seen as a desperate attempt to contain inflation rate.

According to Nico Asset Managers Limited, the weakening currency will also likely increase external liabilities for companies that have foreign currency liabilities on their balance sheets.

It says inflation is expected to continue rising in the first quarter of 2013, but at a slower pace than the last two quarters of 2012 as the exchange rate is showing signs of stabilisation.

The firm, however, projects that inflation is expected to moderate after the maize harvest in March, but with a lag.

“Inflation is expected to moderate thereafter from 12.9 percent in 2014 to 9.2 percent in 2015 as the currency depreciates more gradually and productivity continues to increase.

“Inflation is forecast to rise to an average of 9.7 percent in 2016-17 on account of increasing commodity prices and rising domestic demand, including for capital goods to support the public investment programme towards the end of the outlook period,” says the report.

On a positive note, Nico Asset Managers says depreciation of the kwacha will likely result in reduced demand for foreign exchange; hence, improving foreign currency availability on the market.

Sounding optimistic, the firm has also said donor inflows will continue to provide support for the currency during this lean season until the next tobacco marketing season which starts sometime in March.

The NSO said that Malawi closed the year with an annual average inflation rate of 21.3 percent, a 2.9 percentage points way off the target of 18.4 percent set by Finance Minister Ken Lipenga in the 2012/13 budget.

However, the annual target is 0.1 percentage points lower than the 21.4 percent projection by Reserve Bank of Malawi (RBM) Governor Charles Chuka early this year.