2020: mixed fortunes for Economic indicators

Malawi’s economy was subdued in the ending year, largely in view of the Covid-19 pandemic which wreaked havoc on both domestic and global economy.

As some macroeconomic variables showed some signs of brevity other fundamentals were swayed by volatility, largely on account of the novel virus.

While variables such as interest rate and inflation rate were somehow stable, the local unit, kwacha, was too shaky further disadvantaging the country.

During the year the small and medium businesses bore the brunt as the local unite—which has in the past three years or so remained stable at about K745 to a dollar—depreciated to the US dollar and some major trading currencies, such as the South African rand. 

The kwacha has been under mounting pressure since July, in part due to foreign exchange (forex) shortages—which resulted in the local unit losing value.

As Covid-19 affected businesses across the globe, Malawi’s supply lines and export route faltered; hence, forex supply generated from cash crops such as tobacco tea and sugar, were severely hit.

This coupled with the growing demand arising from Covid-19-related imports Malawi saw a mismatch in supply and demand which exerted pressure on balance of payments and the exchange rate.

The pressure on the kwacha reached its peak in September when the kwacha finally buckled under pressure falling from K820 to K860 to the dollar.

Foreign exchange inflows

Hope for tobacco to leave up to expectation were dashed as prices on both auction and contract markets remained low. By close of the annual marketing season, the news from the Tobacco Commission was not so good.

The country’s main forex earner had only raked in about $173.5 million (about K130 billion) down from $237 million (K177.75 billion at the current rate) the crop realised last year.

On the other hand, RBM figures show that Malawi recorded a balance of payment (BoP) deficit of $134.8 million (about K101.1 billion) in the third quarter 2020 compared to a deficit of $139.8 million (about K104.8 billion) in the preceding quarter.

This is compared to a $98.3 million (about K73.7 billion) BoP deficit recorded in 2019.

But in terms of interest rates businesses had a little something to smile about as the central bank endeavored to keep the policy rate on the lower side to cushion businesses from further collapse.

The policy rate a rate at which commercial banks borrow from the central bank hovered around 13.5 percent, a figure RBM has maintained since June 2019. 

This translated to a lower reference rate the rate at which lenders borrow from the commercial banks. But to stir more private sector activity and recover the economy, the central bank slashed the policy rate to 12 percent in November.

Credit and inflation

On the credit front, RBM figures show that private sector credit continued to expand in 2020, albeit more slowly since June 2019.

In the year, inflation has largely been low as a result of what analysts linked to the effects that Covid-19.

For the most part of 2020, fuel prices which are usually a main driver for non food inflation in Malawi have been low.