For businesses, 2021 will remain a painful year following the tumbling kwacha, which saw the country grappling with higher costs and weaker consumer demand.
The depreciation of the kwacha was not expected as the exchange rate trajectory remained stable for the past three or four years.
But the twist in the trajectory of the local unit, especially against the dollar during the course of the year, wreaked havoc as most businesses recorded foreign exchange losses.
As if that was not enough, the depreciation of the local currency did more harm to an ordinary consumer as it exacerbated inflationary pressures, pushing up prices of basic goods and services.
In part, the considerable weak exchange rate was due to the demand and supply imbalances compounded by the reduced trading activity occasioned by the Covid-19 pandemic, which resulted in lower-than-expected export earnings amid the growing demand for Covid-19-related imports and seasonal agriculture materials.
Reserve Bank of Malawi (RBM) figures show clearly the kwacha’s troubled journey in 2021.
RBM figures on foreign exchange bureau exchange rates published on its website www.rbm.mw indicate that the kwacha retreated from an average of K778 in January to K823 as of December 14.
Malawi, an agro-based economy, experiences seasonality in the foreign exchange market as such the depreciation of the currency also follows the seasonal nature of the market. This was different this year.
During the lean season, there is less foreign exchange coming into the market as the tobacco season is closed and there is high demand for foreign exchange as farm inputs like fertiliser are being imported.
Nonetheless, the tobacco dollars, which edged up by 13 percent this year to $197.1 million (about K160 billion) from $174.97 million (about K143 billion), were not enough to ease pressure on the kwacha.
As the tobacco market opened, the seasonal impact of tobacco dollars that usually trickled into the economy was not clear, as the local currency continued to depreciate.
This according to analysts was a clear sign of strong imbalances of what the country generates in the form of foreign exchange and what it uses for imports.
Explaining the movement of the kwacha, Financial Market Dealers Association of Malawi president Mclewen Sikwese attributed the development to the sustained supply and demand imbalances which he projected would continue to exert pressure on the kwacha.
He said: “With the reserves position low and the existing backlog of foreign exchange bills in the market, the prospects of an appreciation of the kwacha remain remote.
“We are more likely to see a marginal depreciation of the kwacha than an appreciation post the tobacco season.”
Cedar Capital Limited chief executive officer Armstrong Kamphoni explained that there was a backlog of demand for forex in the banks as such the factors that traditionally impact on forex availability were not enough to offset the kwacha situation.
“There has been over 30 percent drop in reserves over the 12 month-period due to demand for forex being higher,”he said.
Malawi Confederation of Chambers of Commerce and Industry president James Chimwaza decried that businesses took full blunt of the kwacha fall which pushed most of the buisnesses to the edge.
“Bearing in mind that we are net importers, the depreciation of the kwacha is a painful experience that businesses have to face,” he said.
In economics, a depreciating exchange rate makes imports more expensive and this leads to higher cost of imports. Even small businesses felt the pinch of the sharp weakening of the kwacha.
Transporters and all motorists were also indirectly hit through the increase in petroleum products occasioned by the loss in the value of the kwacha.
RBM Governor Wilson Banda while admitting the kwacha faced and continues to face pressure, indicating that the central bank is arranging facilities with regional and international banks to provide the country with short-term liquidity in foreign currency to stabilise the kwacha.
He said the medium to long- term strategy was to increase supply through export growth and diversification.