The Economist Intelligence Unit (EIU) has projected that the kwacha will weaken further between 2026 and 2029 in line with the International Monetary Fund (IMF) guidance on a potential new programME for Malawi.
The forecast by the think-tank, a research and analysis division of the UK’s Economist Group, comes at a time government is discussing with the IMF on a possible return of Extended Credit Facility (ECF) that automatically terminated in May this year after Malawi failed to complete formal review within the agreed 18-month window.
EIU, which described the spread between kwacha’s official rate of K1 751 and the parallel rate of K3 500 as huge, has projected that the local unit will depreciate to K2 438 against the dollar in 2026 and K3 250 by end of 2029.
Reads part of the report: “The kwacha will depreciate gradually over the forecast period as the central bank allows greater exchange rate flexibility.
“This will also reflect the paucity of foreign exchange reserves, which we forecast will remain low in 2025-26, at an average of 0.9 months of import cover, before rising to 1.8 months at end-2029.”
EIU further said by 2029, the kwacha will be trading close to its fair value, with a narrower spread between the official and the parallel market rates, reflecting achievement of the policy goal of exchange rate flexibility, coupled with lower inflation.
In an interview on Tuesday, Reserve Bank of Malawi (RBM) spokesperson Boston Maliketi Banda said that discussions with the IMF have just commenced to achieve macroeconomic stability and the devaluation topic is not involved.
He said: “A detailed plan of the steps to be taken will be made known in due course and will obviously focus on stability and promoting the welfare of Malawians.
“In this case, every step will be carefully analysed to ensure that it benefits the economy. So far, it has been made clear that learning from lessons from the recent past devaluations, additional devaluation of the local currency is not part of this process.”
University of Malawi economics lecturer Edward Leman on Tuesday highlighted the need to solve the economy’s underlying structural challenges such as lack of production and exports.
He said: “This is a structural imbalance we have struggled to address despite various policy documents over the years. As long as demand for foreign currency consistently exceeds supply, the local currency will continue losing value.
“The presence of a wide parallel-market premium further complicates the situation, making the kwacha appear overvalued relative to market conditions. We have implemented several devaluations, but the outcomes have tended to be mixed.”
Leman said that in theory, a devaluation should help realign the exchange rate and reduce pressure on the foreign exchange market, but in Malawi’s case it often fuels inflation without reducing demand for imports.
“The IMF may call for exchange rate realignment and the EIU projections may well reflect current fundamentals, but in my view the country does not need yet another round of devaluation on its own,” he said.
Financial Market Dealers Association president Leslie Fatch is quoted by The Nation as having said that there is continued pressure on the local unit due to a backlog on import bills coupled with the limited foreign exchange supply.
He said: “We have to highlight that the introduction of the forex auctions provide a mechanism for flexibility which would allow the exchange rate to move in response to market forces.
“In the event that supply is lower than demand, we would see the rate depreciating while in the event that the supply happens to outweigh demand, the mechanism allows for the exchange rate to appreciate.”
Economics Association of Malawi president Bertha Bangara-Chikadza earlier said the projected direction of the kwacha will exert extra pressure on inflation considering that Malawi is a net importer.
“As a predominantly importing country, depreciation exacerbates imported or cost push inflation. As a result, despite easing food prices, non-food inflation may dampen the inflation outlook in the near-term,” she said.
Prior to the approval of the IMF programme in November 2023, RBM devalued the local unit by 44 percent.
This followed another 25 percent kwacha devaluation in May 2022, developments that have heightened the cost of living crisis as prices of commodities continue to rise.
