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Fears for budget

Devaluation to throw it ‘off balance’

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Ben Kalua

Economic experts have said the 25 percent devaluation of the Kwacha announced on Thursday is likely to throw the 2022-23 National Budget off balance.

But Finance Minister Sosten Gwengwe Sunday said Capital Hill will adjust to a much stricter fiscal policy to contain any budget slippages.

Speaking in an interview Sunday, University of Malawi Economics Professor Ben Kaluwa said, considering that the large proportion of the budget involves procurement, the 25 percent devaluation of the local trading unit could hurt the financial plan.

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Kaluwa said, after devaluing the local currency, “many imported things that were budgeted for in the 2022-23 National expensive” in Kwacha terms. Budget will become

Centre for Research and Consultancy Director Milward Tobias said one assumption in a budget is the exchange rate—mainly because a significant part of procurement is on imports.

He added that the exchange rate is directly associated with the inflation rate.

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Tobias said, with devaluation, it is obvious that the budget will buy fewer goods and services.

He said the Treasury can mitigate against the extent of effects by the fast-tracking implementation of expenditure control measures announced in the 2022 Budget Statement.

While acknowledging the pressure on the fiscus that would emanate from devaluation, Gwengwe said the fiscal authorities will put in place necessary measures to ensure the budget meets its objectives.

“In view of the devaluation, we will be adjusting into a stricter fiscal policy to contain [expenditure] the budget,” he said.

Asked whether the devaluation would force Capital Hill into cutting on some priority areas, Gwengwe said the fiscal authorities will implement austerity measures and more efficiency in budget delivery.

In a statement on Friday, Reserve Bank of Malawi Governor Wilson Banda said although the Kwacha exchange rate adjustment process may add pressure on inflation in the short term, the central bank is committed to prudent monetary and fiscal policies to contain all inflationary pressures within manageable limits.

Banda said, moreover, prices in shops already reflect, to a large extent, bureaux cash rate.

“To that extent, aligning the ADB’s TT rate with the Bureaux Cash Rate should not lead to further price increases. In the short term, this move to a unified, market-clearing exchange rate should make it easier for companies to manage their businesses and therefore strengthen the economy.

“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 into

favourable current account balance and hence, increased foreign exchange reserves. This,

together with the RBM’s commitment to prudent monetary policy conduct should stabilise the Kwacha exchange rate and inflation in the medium term,” Banda said.

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