Performance of the local unit, the Kwacha, has been somewhat predictable in that, each passing year, it would slightly gain or maintain ground against other currencies during the agriculture produce marketing season that lasts between April and July.
However, in 2021 the Kwacha plummeted mercilessly against other currencies in almost each month of the year.
A few instances where the local unit was seen gaining ground against other currencies was mainly due to instability in the corresponding economies illuminated against the Kwacha’s already weaker position.
Depreciation of the Kwacha speaks volumes of how vulnerable the local economy has been. This notwithstanding, continued inflation has left the business community and Malawians in general exploited and robbed off their purchasing power.
The academia and economic experts have maintained that such trends are triggered by the country’s huge appetite for imports against a narrow export base.
For example, Malawi imports toothpicks, secondhand clothes, China-made clothes, pumpkins, bananas, among other useless items that could be easily produced locally on top of essential goods such as petrol and diesel, fertiliser and machinery for production of products.
In turn, the country exports raw tobacco, raw cotton, raw tea, sugar, Soya and, most recently, maize flour which earns a few dollars not even close to the imports.
This trend continued in 2021 and saw foreign exchange reserves being depleted while creating a huge demand for forex, which, in turn, pushed the rates up.
For example, On January 4 2021, the Kwacha was trading against the United States (US) Dollar at K778.8 per dollar but closed the year trading at K824.4 per dollar, according to figures from the Reserve Bank of Malawi (RBM).
This represents a 5.8 percent drop in value against the dollar for the Kwacha in 2021.
However the figures have been elevated in commercial banks, with some closing the year offering the dollar at as high as K950.
Such a performance of the Kwacha is evidence of scarcity of foreign exchange in the country which, for the better part of the year, was recorded below the recommended threshold of three months cover.
RBM’s Weekly Financial Market Developments brief for the week ending December 17 shows that gross official foreign exchange reserves declined by about $36.4 million to close the review period at $411.8 million, representing 1.65 months of imports.
According to Financial Market Dealers Association (Fimda) President Mclewen Sikwese, the main reason the import cover has been below the recommended three months is the rebasing of the monthly requirement from $209 million to $250 million.
“The continued decline of the country’s foreign exchange reserves will continue to impair the central bank’s capacity to support the market with foreign exchange liquidity critical for a stable Kwacha. Furthermore, the situation is exacerbated by the lean season and the impact of the Covid pandemic,” a Fimda report, as quoted by Nico Asset Managers, reads.
Malawi University of Business and Applied Sciences (Mubas)-based economist Betchani Tchereni believes countries such as Malawi stand to be hit hardest with unavailability of foreign exchange because of its over-dependence on imports.
Tchereni added that in the next three months, if donors would not come in to help the country, then foreign exchange availability will continue to be a problem because the country is entering the lean period.
“We need to have import substitution by making sure that, unless they are raw materials or something we cannot manufacture, most of the things that we consume should be manufactured in the country,” Tchereni said.
Financial Market analyst Cosmas Chigwe concurs with Tchereni, saying the best way to deal with the problem is to turn around the country’s export trends rather than depending on raw agricultural products.
“We need to add value to our export products which fetch cheaper prices,” Chigwe said.
Minister of Finance Felix Mlusu said in an interview the scarcity of foreign exchange is indeed a factor and the government is making moves to improve Malawi’s export base.
“We have to work towards exporting more and this is why we are coming with strategies such as the recently launched National Export strategy II so that we are able to generate enough forex for us to develop,” Mlusu said.
On December 16, President Lazarus Chakwera launched the National Export Strategy – NES II which is touted to be a pathway towards doubling exports.
Malawi remains a consuming and importing nation highly dependent on exporting raw agricultural products such as unprocessed tobacco.
Justin Mkweu is a fast growing reporter who currently works with Times Group on the business desk.
He is however flexible as he also writes about current affairs and national issues.