The Economist Intelligence Unit (EIU) says Malawi’s current account deficit is expected to remain wide largely due to a large merchandise trade deficit owing to the country’s dependence on fuel and capital imports.
The current account deficit—a measurement of a country’s trade where the value of goods and services it imports exceeds the value of produce it exports— has traditionally been averaging just under 19 percent of gross domestic product in the past decade.
In its brief contained in the Nico Asset Managers August Report issued on Thursday, the EIU—the research and analysis division of Economist Group— sees a sizable current account deficit between 2021 and 2025 regardless of the projected higher exports.
Reads the report in part: “Although export earnings are forecast to increase in 2021 and 2025 amid a gradual recovery in external demand, import spending will also pick up as global prices for inputs are also on the rise.”
The EIU, however, expects that going forward, trade deficit will narrow gradually as export growth outpaces rising imports spending from 2021 as economic growth quickens and work commences on capital projects, particularly in the energy sector.
“Increased export volumes of agricultural products, mainly tea and soya beans and tobacco will keep export earnings on an upward trajectory supported by higher global prices,” says the EIU.
Reserve Bank of Malawi figures show that Malawi’s external position weakened substantially in 2020 when the current deficit widened by 5.9 percent to $1.8 billion (about K1.4 trillion) in 2020 from $1.7 billion (K1.3 trillion) in 2019.
Similarly, in the second quarter of this year, merchandise trade recorded a wider deficit of $490.70 million (K394.20 billion) than a deficit of $413.70 million (K325.00 billion) recorded in the previous quarter.
Owing to the under performance of the current account, Malawi’s gross official reserves have been under pressure due to the country’s rising demand for imports.
The gross official forex reserves for August 2020 decreased to $604.50 million or 2.42 months of import cover from $642.86 million, an equivalent of 3.08 months of import cover in August 2020.
The situation has in turn continued to strain the exchange rate movement, with the kwacha depreciating against all major currencies in the past eight months and slipping to K820.69 against the dollar.
Malawi’s economy is agro-based where agricultural products dominate the exports basket, accounting for about 80 percent of the country’s exports.
In its recent economic review, Bridgepath Capital Limited in its recent economic review report said the growing current account deficit remains an issue of concern as export earnings are concentrated in a narrow basket of agricultural goods.
Reads the report: “Tobacco, which accounts for about 56 percent of total exports, will continue to be subjected to demand shocks.
“Adverse weather conditions may result in low harvests and trade revenues which may influence macroeconomic stability, leading to higher inflation, greater currency volatility and weaker economic growth.”
Government is currently implementing policies and strategies to narrow the trade gap.
Among other policies and measures, according to the Ministry of Trade spokesperson Mayeso Msokera, is the building of export readiness of local exporters and developing regional and global value chains.