The Economist Intelligence Unit (EIU) says the kwacha will continue to depreciate against the dollar and will likely end the year at about K1 064, a development that will affect inflation and heighten cost of living crisis.
The EIU, the research and analysis division of Economist Group, has attributed this development to the current account deficit and the high global commodity prices.
The kwacha, which is currently trading at K1 036 to a dollar, was weakened by a 25 percent devaluation against the dollar on May 27 this year, a move the Reserve Bank of Malawi (RBM) said was necessary to align the foreign exchange supply to the macroeconomic fundamentals as well as ensure supply of foreign exchange in the formal market.
In its latest forecast contained in the Nico Asset Managers Mid-Year Economic Report published on Tuesday, EIU observed that due to the chronic balance of payments challenges, foreign exchange reserves have continued to decline, exerting pressure on the local currency.
EIU has projected that the kwacha is expected to end the year at K1 064 to a dollar and decline further to K1 166.7 by 2026.
Speaking in an interview on Tuesday, market and economic analyst Bond Mtembekeza warned that if nothing radical is done, the kwacha fall is inevitable, a situation which would impact the country’s runaway inflation and general economic growth as a depreciated exchange rate brings imported inflation.
He said: “Considering that Malawi predominantly imports its raw materials for production and manufacturing, a depreciated exchange rate makes these raw materials expensive and therefore producers don’t import as much and production declines which affects economic output and growth.
“Unfortunately all measures that can anchor the exchange rate sustainably have a medium-term to long-term horizon. However, there are some things that can be done in the short-term like lobbying and incentivising the diaspora to repatriate their income home.”
Financial Market Dealers Association of Malawi vice-president Jim Kalua said in an interview the country is already in an awkward situation with import cover sitting at 1.66 months as at June against recommended three months.
He said: “As a nation , the trend will greatly be affected as well considering that soon there will be pressure to start procuring fertiliser.
“Such depreciation which is inevitable would push people to cough more as commodity prices go up. As a country, which largely depends on donor funds and few commodities, we need to export more because the chronic balance of payments imbalances will not spare us.”
RBM spokesperson Ralph Tseka was yet to respond to our questions, but RBM Governor Wilson Banda is on record as having said that in the medium to long-term, it is expected that the economy’s structure of production and consumption will change towards increased exports and reduced imports, resulting in favourable current account balance and increased foreign exchange reserves.
He said RBM is committed to prudent monetary and fiscal policies to contain all kwacha volatility in the short to medium-term
“In the initial stages, there may be volatility, but going forward, there will be a stable transition and therefore benefit every Malawian as we are now going to have fuel, medicine and other crucial essentials available in the country,” said Banda.
Meanwhile, data from the RBM shows that forex reserves continue to drop.