Alliance Capital Limited has warned that Malawi’s ailing economy is unlikely to stabilise soon as most donor inflows would undergo ‘usual bureaucratic processes’ before flowing into the economy.
The firm, the independent registered portfolio and investment managers also involved in pension fund asset management, money market brokerage and corporate finance advisory, made this assessment in its latest market update for the period ending May 25 2012.
“Malawians need to brace themselves for harder times ahead as the economy is unlikely to stabilise soon,” it warns.
Malawi’s most urgent problem today is the critical shortage of foreign currency, with import cover hovering around one month.
The International Monetary Fund (IMF) projects that Malawi’s import cover will average 1.2 and 1.1 months in 2012 and 2013, respectively.
Such projected low foreign currency reserve position for Malawi, a net importing country, confirms Capital Alliance Limited’s worries on the stability of the economy as it simply means that the country would struggle to have enough reserves to meet escalating import bills, service foreign debt as well as to pay government expenditures overseas.
Donor inflows, which are the second most important source of foreign currency after tobacco in Malawi, are key to cushion the country’s balance of payments (BoP) position which has been under severe pressure due to the suspension of budget support by key donors since last January.
Already, available figures speak volumes of a troubled foreign exchange buffer for Malawi which is sitting on just $121 million worth of official foreign reserves, representing a 0.94 months of import cover as at 30 April, 2012.
Three months of import cover is internationally accepted as a healthy amount of reserves for any country to continue to support its current level of imports if all other inflows and outflows cease.
“Our expectation is that import cover is now much lower than the last reported figure and the need for donors and other been generating inadequate foreign exchange cash to finance importation of critical imports such as drugs, fuel and fertiliser.
This has in turn worsened Malawiâ€™s trade gap reflected in the countryâ€™s deteriorating terms of trade (ToT) defined as relationship between the prices at which a country sells its exports and the prices paid for its imports.
In 2011, Malawiâ€™s trade gap, the difference in value over a period of time of a country’s imports and exports of merchandise, is estimated at K114 billion ($456 million).
Legrand explained that Malawiâ€™s participation in EU trade remains limited, ranging from 0.01 percent to 0.02 percent of total EU trade.
But he said despite such a dismal trade performance to the EU, Malawi continues to be one of EUâ€™s largest trading partners.
â€œEU27 was Malawiâ€™s second largest trading partner in terms of its imports, which amounted to a value of 138.5 million euros, representing 12.9 percent of Malawiâ€™s total imports from the Rest of the World in 2010,â€ said Legrand.
He said looking at the trade composition between the regional groupings, it is noted that the EU still ranked second as an export destination for Malawiâ€™s products as at June 2011.