Malawi’s foreign exchange reserves have dropped 16.55 percent in the past year, a development local economic analysts have cautioned could put pressure on the local currency, increase inflation and limit imports of critical commodities.
Data contained in the Financial Markets Development Report by the Reserve Bank of Malawi (RBM) released on Friday shows that the country’s forex reserves dropped from $658.91 million (about K1.1 trillion) or 2.7 months of import cover to $549.85 million (about K961 billion), an equivalent of 2.2 months of import cover at the end of August this year.
Economist Bond Mtembezeka, who is Business Partners International country director, in an interview on Sunday expressed concern that the drop in the country’s forex reserves could pile pressure on the already weak kwacha.
“The risk of devaluation is quite strong as a significant drop in import cover coupled with reduced foreign exchange flows exerts pressure on the foreign exchange market leading to currency depreciation and devaluation,” he said.
On his part, Scotland-based Malawian economist Velli Nyirongo cautioned that the drop in foreign exchange reserves, coupled with the weakening of the kwacha, could worsen the country’s inflation, currently at 33.9 percent as of August this year, according to the National Statistical Office.
He said forex shortages normally result in weaker local currencies, a development that triggers imported inflation.
Said Nyirongo: “The effects are more pronounced in countries such as Malawi, which are heavily dependent on imports such as fertiliser, fuel and essential medicines.
“The impact on inflation is likely to be pronounced. A reduction in import cover typically leads to a weaker kwacha, which increases the cost of imported goods.”
He said in a country such as Malawi, which is heavily reliant on fuel and fertiliser imports, this can trigger cost-push inflation.
Economist Gilbert Kachamba said in an interview on Sunday that prices of goods and services rise not only due to shortages, but also because of the higher cost of obtaining foreign exchange to import the goods.
“As a result, the cost of living for ordinary Malawians will likely continue to increase, putting additional pressure on households and businesses.
“This could also affect monetary policy, with the central bank possibly tightening policy to control inflation.”
In August 2023, the price of a 50 kilogramme bag of fertiliser was selling between K65 000 and K80 000, but has since increased to between K75 000 to K100 000 this year, according to prices listed in selected shops across the country, a development that will likely put pressure on farmers ahead of the 2024/25 growing season.
