Kwacha could drop by 9% in 2019—EIU

The kwacha may depreciate by about nine percent against other foreign currencies this year largely due to pressure on increased spending towards the May 21 2019 Tripartite Elections, the Economist Intelligence Unit (EIU) has projected.

But Reserve Bank of Malawi (RBM) has disputed the projection, saying it remains upbeat that the local unit will remain stable going forward because Treasury has assured that expenditure towards elections will be within the budgeted figures.

The projection by EIU comes at a time the country’s nominal exchange rate has largely stabilised relative to major trading currencies supported by adequate foreign exchange reserves on the market.

Such a stable exchange rate throughout 2018 also helped to ease inflationary pressures while anchoring inflation expectations in the short to medium-term.

“EIU, thus, expects the pace of annual currency depreciation to increase to over nine percent in 2019,” says the EIU forecast contained in February 2019

economic report by Nico Asset Managers, a local investment advisory firm.

EIU says fiscal consolidation after the elections will put pressure on the local currency up to 2020.

If the kwacha depreciates by such a margin as forecasted by EIU, the situation could make importers directly feel the pinch as they will be forced to source more kwachas to purchase a unit of a foreign currency, especially the dollar.

However, such a depreciation in the medium to long-term could culminate into higher import costs and relatively cheap domestic exports on the international market; hence, boosting the country’s export growth and lower the trade gap—the gap between total value of imports and exports.

Reads the report in part: “In 2021-22, a weaker dollar and higher exports aided by a strengthening in the prices of some of Malawi’s agricultural exports should provide further modest support to the kwacha.”

In February 2019, the kwacha marginally depreciated against the dollar and the British pound, but the local unit appreciated against the South African rand and euro.

Malawi’s gross official reserves are at $790.28 million (about K583 billion) or 3.78 months of import cover.

But RBM spokesperson Mbane Ngwira, in an interview on Friday, questioned the basis of EIU projection, saying the expectation is that government will spend within the stipulated budget towards elections.

“Probably the EIU is basing on previous experiences in terms of increased spending towards elections, but that is misleading.

“They could have looked at the current revised budget. As far as we are concerned, the budget [towards elections] has not derailed and government has also said it will not spend beyond the budget,” he said.

The elections budget is estimated at K31.5 billion and will cover voter registration and verification, education and outreach, election materials, vehicles and polling services.

Treasury plans to fund the May 21 2019 Tripartite Elections without donor support. n