By Kingsley Jassi:
Malawi needs at least, $3.5 billion to adequately settle growing import bills. With the population growing rapidly at 2.5 percent annually, the weakening export base is not helping matters, culminating in the country generating just around $1 billion.
At the turn of 2024, in January, the country’s total foreign reserves were $679.54 million, which represents 2.32 months of import cover.
What followed was a constant decline of the reserves and the Reserve Bank of Malawi only showed figures up to August, when the country had $549.85 million—which is just 2.20 months of import cover.
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Thereafter, financial market updates by the central bank no longer show the forex position— both official and private sector reserves. This was preceded by the updates that started to combine the official and private sector reserves, departing from the broken down figures.
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Conversely, Malawi faced a complex forex situation in 2024, driven by various economic factors including trade dynamics, low foreign investment and fiscal policy discrepancies.
As Malawi continues to navigate the economic landscape, several key factors need to be analysed to present a clear picture.
Malawi’s economy heavily relies on agriculture, with a significant portion of its gross domestic product (GDP) deriving from this sector.
Tobacco, tea, coffee and now soya beans are also crucial for the country’s export earnings.
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Poor harvests in the 2023-24 season and weak response to the crisis meant the economy was set to be riddled by supply-side effects.
True to that, food has been in short supply, causing prices to be on the rise as maize is now selling at a record price of K1,000 per kilogramme in some markets.
The low supplies of agricultural produce have not only affected the retail market; even the industry that needs raw materials has not been adequately supplied, hence an apparent slow down with just a 0.3 percent growth. This has affected exports and import substitution.
The National Statistical Office reported recently that total exports for the first half of 2024 amounted to just $257.8 million, reflecting a 20.1 percent decline from $322.5 million during the same period in 2023.
This is against imports worth over $1.4 billion. The slight decline by 4.2 percent from $1.47 billion during the corresponding period last year meant a 0.3 percent deterioration of trade balance to $1.15 billion in the first six months of the year.
Low supplies of food and forex have, so far, caused both food and non-food inflation to rise as the Kwacha has been losing value, thereby eroding purchasing power.
This is despite the country securing the Extended Credit Facility (ECF) with the International Monetary Fund (IMF) in November last year, as expectations were of the increase in foreign aid to help build foreign reserves.
As the country has been working towards rebuilding the reserves, including those caused by global commodity price fluctuations, results have not shown and the situation keeps worsening.
Even the IMF, in August, expressed concern over the issue and urged the authorities to work on the crisis by making necessary fiscal and monetary policy adjustments to sustain the ECF.
However, as necessary as currency devaluation appears, the authorities have ruled out the move several times, citing the devastating impact on low income earners.
Inflation is already high and poised to average above 32 percent this year.
However, the forex situation also has a link to fiscal policy as the Treasury’s increased spending exerts more pressure on the foreign reserves.
As a response to these pressures, RBM has been proactive in implementing measures aimed at stabilising the Kwacha. This includes adjusting the policy rate and Liquidity Reserve Requirement ratio and intervening in the forex market with several measures.
Despite these efforts, the gap between demand for forex and limited availability persists, leading to an elongated depreciation of the currency and impacting import-dependent sectors as the industry and households are suffocating.
