Blantyre-based investment advisory firm Nico Asset Managers Limited has cited four key risks to the country’s economy which might wipe out gains registered in 2014 and before.
The four risks, according to the firm, include the withholding of budget aid by donors, high interest and inflation rates and a persistently weak export base.
The alleged theft and corruption within the public sector, dubbed Cashgate, led to concerns among donors who have withheld aid since November 7 2013.
Donors are still holding on to their money until they are satisfied with the controls implemented in government financial systems at Capital Hill.
“This [continued withholding of donor aid] will impact on the availability of forex and the continued weakening of the kwacha, thereby pushing up inflation,” said Nico Asset Managers in its October monthly economic report.
The firm has projected that high interest rates, triggered by the recent 2.5 percentage points hike in policy rate to 25 percent, may result in slow-down in private sector growth and a decrease in capital investments.
It said high interest rates may also lead to high default rates and lower private sector activity.
Commenting on inflationary risk, the firm explained that inflationary pressures will emanate from the rapidly depreciating currency and the speculation on food prices as a result of uncertainty of the food situation in the country.
Already, the kwacha has massively lost ground to the dollar, trading from a rate of around K390 early last month to sink to a record low of K520 in some authorised dealer banks (ADBs) and foreign exchange bureaus.
“This [rapidly depreciating kwacha] will create cost-push inflation as the prices of general goods and services also go up.”
The country’s year-on-year headline inflation decreased in September 2014 to 23.7 percent from 24.5 percent in August 2014, largely due to a decline in both food and non- food inflation.
But many analysts, including the International Monetary Fund (IMF) believe the rate of inflation for Malawi remains high.