The Reserve Bank of Malawi (RBM) has called for the diversification of the country’s economy, particularly on exports earnings to enable the central bank effectively manage exchange rate movement.
The reaction by the central bank comes days after the kwacha marginally depreciated by three percent against the US dollar from K1 063 to K1 095, the second fall in two months. In June, the kwacha also depreciated by 2.6 percent.
The kwacha fell before the official close of the sales of tobacco, which has raked
in $281.3 million (about K308 billion), a jump from $166.4 million earned during the same period last year.
The revenue from tobacco is just $30 million (about K32 billion) above the country’s monthly import bill of $250 million (about K274 billion).
Malawi annual import bill is pegged at $3 billion (about K3.2 trillion) against exports at roughly $1 billion (about K1 trillion).
In a written response on Thursday, RBM spokesperson Mark Lungu said while the tobacco market has done relatively well compared to the previous season, the earnings are not enough to meet the country’s forex demand.
He said: “The earnings have definitely assisted
the country in one way or the other. However, it is important to realise that tobacco earnings are not enough to meet our demand as a country.
“As such, there is need to diversify the economy, particularly on export earnings so that we manage exchange rate movements. RBM is always on guard to manage demand, but that has to be matched by responsive structural transformation that will unlock supply side factors.”
Meanwhile, the foreign exchange shortage remains acute with World Bank data showing that gross official reserves decreased by half from $388 million in May 2022 to $195 million in May 2023, equivalent to around 0.8 months of import cover.
This is much lower than the recommended adequacy level of 3.9 months of import cover for a credit-constrained economy.
In an interview, market analyst Bond Mtembezeka said the depreciation of the kwacha against the dollar signifies that the pressure is mounting on the local unit.
“We should expect the kwacha to continue to lose ground, especially when the tobacco market has closed,” he said.
Economist and researcher Exley Silumbu said the depreciation signifies a continuously tight official foreign exchange market and a worsening trade balance as import demand outpaces the rate of export earnings.
“From another perspective, this could be a deliberate policy initiative to attract forex into the official market as this market faces stiff competition from the parallel or black market,” he said.
