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Economic prospects looking really scary

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That the Malawi kwacha would at some point start fluctuating negatively is something that was widely expected, especially in the business and financial circles. However, very few would have expected the depreciation to start at the time tobacco growers are still earning the country forex at the auction floors and when the country is said to be sitting on reserves above the internationally recommended import cover of three months.

It therefore came as a big surprise to many last week when sharp negative movements started to be noticed on the exchange rate.

The loss in value of the kwacha at this point in the economy is obviously a result of speculative trading by dealer banks and other traders who have most likely started holding on to their dollars and rands in anticipation of reduced supply in the coming months.

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However, it also indicates the level of uncertainty among various players who are not sure about what the economy will bring going forward. In a country where people are used to expecting donor aid to maintain foreign exchange inflows when tobacco sales stop, there are still many who don’t believe that the country can maintain a healthy forex position without balance of payment support.

When similar uncertainty almost wrecked havoc last year, the government pulled a pleasant surprise which saved the kwacha and the economy from an imminent crisis. A US$250 million debt swap facility from the PTA Bank brought relief and optimism on the market which led to a historical appreciation of the kwacha during what is commonly regarded as a lean period of the economy around November.

The government will need an even bigger piece of magic this time around to suppress the level of pessimism that is currently prevailing in the economy.

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The doubts could be justifiable considering that apart from the absence of budget support, the country is also expected to start experiencing maize shortages in the coming months that will mount further pressure on various economic factors, including inflation, the exchange rate, the government budget as well as bank lending rates.

To meet the food deficit in the country and maintain maize supplies on the market, the government will have to dig deeper in its already depleted pockets to buy maize for both Admarc and the National Food Reserve Agency (NFRA).

Apart from the fiscal pressure, the maize purchases will also increase demand for foreign currency as some of the maize will have to be imported from neighbouring countries, thereby taking away a substantial amount of foreign exchange from commercial banks and RBM at a time the country will also have to import fertiliser and other inputs for the coming agricultural season.

Shortages or speculative trading of maize naturally increases pressures on inflation which is largely driven by the food basket dominated by maize.

The increasing inflation combined with an anticipated widening of the budget deficit will force the central bank to tighten monetary policy by increasing the official lending rate in an attempt to arrest potential runaway inflation.

It is such prospects that are causing all the uncertainty in the economy whose effects are already being felt on the foreign exchange market.

So unless the government comes up with another piece of magic, we should all tighten our belts and brace for tougher economic times ahead. The future really looks gloomy and we all have reason to be worried.

It is still up to the government to instill confidence in the economy and suppress the speculative behavior on both the foreign exchange and maize markets to save the economy from further deterioration that will have consequences on people’s incomes and well being.

Fiscal discipline should continue to be the order of the day to prevent further widening of the budget deficit as that could force treasury to borrow from the market for financing of government operations and services.

At no point should we allow the programme with the International Monetary Fund to get off track as a good standing with the fund ensure another disbursement from the fund and sustain some slender chance of a few donors such as the African Development Bank, the European Union and probably the World Bank providing some budget support.

The central bank should explore ways of intervening on the market through sales of foreign exchange to commercial banks as a way of frustrating the speculative elements on the market. And the maize market should be carefully managed to make sure that it does not worsen the economic woes in the country. Otherwise, there are genuine grounds to be afraid of the economic prospects!

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