EIU forecasts increase in 2012 exports

The influential Economist Intelligence Unit (EIU) has forecast a pick-up in exports in 2012 largely propelled by lower domestic tobacco production, a development that will prop up prices for the leaf.

The prediction by the EIU in its monthly economic report for January, comes at a time the Tobacco Control Commission (TCC) indicated that international buyers want between 150 and 160 million kilogrammes of tobacco this year as per the global trade requirements.

This also comes at a time the tobacco regulatory body has introduced quotas to allow farmers to grow the crop according to the land size to improve on quality.

“Export growth for the period 2013 to 2016 is expected to average 5.7 percent as tobacco exports are supported by favourable international price trends,” explained the EIU.

As the exports surge, growth in imports is expected to slow as a weaker currency encourages consumption of domestic goods and services.

The International Monetary Fund (IMF) and other local economic experts have argued that Malawi’s currency is overvalued, increasing appetite for the importation of goods at the expense of low foreign currency reserves which are usually below the internationally recommended three months of import cover. The EIU has explained the implications the export surge.

“Increase in exports and declining imports will result in improved forex availability; hence, supporting the value of the local currency and attracting foreign direct investment. Overall, this is expected to boost economic growth,” said the EIU.

Currently, Malawi is struggling to improve its export which has been narrow for a long time. When he took over office in 2004, President Bingu wa Mutharika declared that he wants to turn the Malawi from a predominantly importing and consuming nation to a predominantly producing and exporting nation.

However, this direction seems to be moving at a snail’s pace. The EIU report which has also commented on a wide range of issues said uranium output at Kayelekera Uranium Mine (KUM) in Karonga is expected to stabilise.

Its prices, according to EIU, is also expected to strengthen in the period 2014 to 2016. Commenting on the delay to devalue the local currency as demanded by the International Monetary Fund (IMF) and other economic commentators, the EIU said the major implication of not devaluing the kwacha will be the continued withholding of aid by donors.

“This would exacerbate the current forex shortages which would negatively affect the ability to import items such as fuel, fertilizer and other materials. Overall, this will affect production in various sectors of the economy resulting in low economic growth,” said the EIU.

Withholding of funds by donors, the think-tank said, will also result in widening of the fiscal deficit raising government’s demand for borrowing.

But it said Malawi’s ability to borrow may be affected by foreign exchange shortages since donors may be reluctant to lend to a nation that may not be able to repay in the agreed currency.

Shortages of foreign currency will also affect Foreign Direct Investment (FDI)-net inflow of investment-as foreign investors will be uncertain about their ability to convert investment returns to foreign currency.

But it said the devaluation of the kwacha will also cause imports to become more expensive; hence, worsening the inflationary environment and causing the trade deficit to widen. In addition, this will put a strain on profits of importing companies and also on the wider economy.

Mutharika has been adamant is letting loose arguing that devaluation is not the panacea to Malawi’s foreign currency shortages. He said devaluing the local unit would hurt the poor the most with escalating prices of goods and services.

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