Wednesday’s 44 percent devaluation of the Kwacha is expected to pile significant pressure on the budget, whose initial structuring had been based on the previous exchange rate of the local currency to the United States (US) dollar.
While the budget is in Kwacha, it has several elements that appear in foreign currency, such as loan repayment, import-based procurement, salaries and other benefits for employees in foreign missions and public officers’ foreign trips.
In general, for a country whose imports are way higher than its exports, devaluation of the local currency has to affect the national budget, experts say.
Minister of Finance Simplex Chithyola Banda admitted in an interview Thursday that the devaluation of the Kwacha, from K1,180 to K1,700 against the US dollar, will affect both revenue and expenditure.
He was responding to our enquiry on the implications of the devaluation, which some experts argue is a necessary evil and was long overdue.
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“The country will need more Kwachas to provide social services. We will also be getting more Kwachas from any dollar that the government receives,” Chithyola Banda said.
He disclosed that his ministry is working on a detailed analysis to help on budget-line adjustments which will be shared during the mid-year budget review meeting later this month.
“We understand the implication of the devaluation, but it is a necessary evil towards economic recovery and the advantage of the same will be seen in some few months from now.
“As government, plus our partners, we are working towards providing cushioning measures that will ease and lessen the economic pressure that will come as a result of the devaluation,” Banda said.
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Economist Betchani Tchereni said in a separate interview that the 2023-24 national budget was based on a number of assumptions including that inflation would be around nine percent and that interest and exchange rates were expected to be on the lower side.
Tchereni indicated that with the devaluation, the assumptions have been violated to the extent that all the estimates for procurement are now rendered too low.
“As such, the budget will have to be adjusted or it has to be the case that those estimates and budget lines must be trimmed.
“The devaluation for an import-dependent country is inflationary and this inflationary pressure will be affecting not only households but the government too,” he said.
Malawi Economic Justice Network Executive Director Bertha Phiri also pointed out that the devaluation will have a negative impact on the national budget as what was projected will not be realistic in all sectors.
Phiri said the social sectors are already suffering as the country is undertaking debt servicing and that many developments “will now stall” with the devaluation.
“For instance, whatever we planned for essential drugs will not be realistic and people will be grasping for the drugs,” Phiri said.
In May last year, government devalued the Kwacha by 25 percent in what was seen as a return to a market-determined foreign exchange rate regime to prop up dwindling forex reserves.
