Current account deficit widens to 20% of GDP

The Reserve Bank of Malawi (RBM) has projected a widening current account deficit to 20.5 percent of gross domestic product (GDP) largely due to lower exports, remittances and higher Covid-19-related imports.

A current account is the difference between exports and imports over a particular period of time.

In its bi-annual Monetary Policy Report, the RBM, however, expects the exports to improve over the forecast period as the second wave of the pandemic had a marginal effect on demand for Malawi’s exports.

Reads the report in part: “Imports growth will outpace exports growth in the second half of this year due to a surge in aggregate domestic demand. This will cause the positive contribution of net exports to fade out.”

The RBM data show that the country’s external position weakened in 2020 where the current account deficit—the measurement of the country’s trade where the value of goods and services imported exceeds the value of products exported—widened by 5.9 percent to $1.8 billion (K1.4 trillion) from $1.7 billion (K1.3 trillion) in 2019.

Owing to the underperformance of the current account, the foreign exchange market faced a challenge of insufficient supply of foreign exchange to satisfy demand, according to the RBM.

As a result, gross official reserves at the end of 2020 dropped to $574.3 million (K453 billion), an equivalent of 2.7 months of import cover from $819.5 million (K647 billion) recorded at the end of 2019, an equivalent of 3.9 months of import cover.

The foreign exchange reserves further declined in March to $410.16 million (K324 billion), an equivalent of 1.96 months of import cover.

Analysts have warned that the country will continue to experience a wide current account deficit if it does not invest in the expansion of the export basket which is dominated by a few products.

In its March 2021 Economic Review, Bridgepath Capital Limited said the growing current account deficit remains an issue of concern as the country’s export earnings are concentrated in a narrow basket of agricultural goods.

Reads the report in part: “Tobacco which accounts for about 56 percent of total exports will continue to be subjected to demand shocks.”