The fast-falling kwacha, which hit an all-time low of K520 against the dollar last week, may force some businesses to close shop, a situation that could send ripple effects across the economy, economic commentators have said.
The local unit, which has so far shed off over 20 percent since the closure of this year’s sales of tobacco, the country’s principal forex earner, has been falling due to a number of factors, including speculation and donor aid freeze, according to financial market analysts.
But apart from pushing up prices of goods and services, the latest being Friday’s raise in the prices of fuel, businesses are equally under threat with some getting deep into debt while others are about to fold up.
In a telephone interview on Thursday, Lewis Chiwalo, who is Economic Empowerment Action Group (EEAG) president, said the situation is dire and sooner or later companies may fold and possibly diversify into other businesses.
“The situation is not healthy. If you price your contract based on K400 exchange rate to the dollar and then the kwacha depreciates to K500, you certainly would incur a huge loss,” he said.
Chiwalo, who is also managing director of Multicoms Trading Company, an enterprise that imports various engineering equipment, said the situation is even serious because of the country’s size of the economy.
Candlex Limited operations and marketing director Fredrick Changaya said the depreciation of the kwacha has two major effects.
He said the fall will certainly push up prices and reduce people’s disposable incomes and, therefore, reduce demand.
“If demand falls, we will not sell and produce more and we will not enjoy economies of scale. Due to the fall of the local currency, we are also being forced to borrow at exorbitant interest rates to meet our import requirements,” said Changaya, whose company produces for the mass market.
He, however, called on the Reserve Bank of Malawi (RBM) to implement policies, including rationing forex, that would see businesses benefitting from the little forex available on the market.
Minister of Finance, Planning and Economic Development Goodall Gondwe, in an earlier interview, said rationing of forex would not be possible.
Due to factors including the fall of the local currency, RBM raised its December 2014 inflation estimates from 20.5 percent to 25.4 percent.
Last week, Consumers Association of Malawi (Cama) executive director John Kapito said the fall of the kwacha has serious implications for local Malawians, bearing in mind that the country had elections this year.
He said due to the kwacha depreciation, there will be price increases in basic goods and services and employees will be asking for higher wages.
Malawi normally faces acute foreign currency shortages during the lean period when its demand exceeds supply.