Current account deficit narrows to 10%

Malawi’s current account deficit has narrowed to 10 percent of gross domestic product (GDP) in 2017, from 13.6 percent in 2016, published figures from the International Monetary Fund (IMF) show.

The current account deficit is the net of the balance of trade. In simpler terms, a country is said to have a trade surplus if its exports exceed its imports and a trade deficit if its imports exceed its exports.

RBM head quarters

The IMF data released on Tuesday attributed the narrowing of Malawi’s current account deficit to lower maize imports and higher prices for some exports in the year under review.

Last year, the Bretton Woods institution had forecast the deficit to narrow to 12.5 percent and 9.1 percent of GDP in 2017 and 2018 respectively.

Reserve Bank of Malawi (RBM) had however projected an eight percent jump in current account deficit in 2017, from the previous year.

The development comes in the wake of persisting trade balance in general due to the country’s insatiable appetite for foreign goods, and reliance on imported inputs for production.

Development economists argue that a current account deficit is not necessarily bad depending on the nuture of imports and exports.

They argue that imports in machinery equipment and services that can boost industrial production for exports could result into current account surplus the subsequent year following high production.

Economics Association of Malawi (Ecama) executive director Maleka Thula said Wednesday that if the decrease in current account deficit continues for a sustained period, Malawi will be able to reverse the current account pattern to become a net exporter.

He explained: “Among other benefits, this development is important for macroeconomic stability as less forex is demanded to meet the import bill, the local currency strengths and becomes more stable, and there is reduced pressure on domestic inflation arising from imported inflation.

“If the decrease in current account deficit continues for a sustained period, Malawi will be able to reverse the current account pattern to surplus meaning that the country would be transformed into a net exporter. However, this requires more investment in productive sectors that will allow expansion of the country’s export base.”

Catholic University dean of social sciences Gilbert Kachamba said while exports are getting closer to imports, it would be difficult to sustain the trend.

“Narrowing current account deficit means that the balance of payments is moving towards equilibrium, that is to say our exports are getting closer to imports, which are a good sign for the economy. However, this trend cannot be sustained; looking at the volatility of agricultural commodities markets, and also our appetite for foreign products is unquenched. We need to improve on our manufacturing sector and increase exports from the same sector,” he said.

In an earlier interview, RBM spokesperson Mbane Ngwira said the country needs to produce more, observing that the central bank is contributing to this direction through support it gives to the Export Development Fund (EDF)—a development finance institution with a particular focus on export—and other import substitution activities.

According to experts, recurrent current account deficits have a dent on the country’s gross official reserves and in turn affect the value of the local currency.

Imports of non-essential goods and services may imply that the local currency maybe overvalued; hence, encouraging imports and hurting exporters.

However, monetary authority policies are aimed at growing the country’s gross official reserves, currently at 4.78 months of import cover as of April 25 2018, above the preferred three months, which is regarded as a rule of thumb.n

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