The country’s local unit, the kwacha may depreciate by about five percent, partly because of expected large current account deficits, the African Development Bank (AfDB) has warned.
The projected depreciation comes at a time when Malawi is expected to register growth of about 4.6 percent.
According to the AfDB 2019 Southern African Regional Economic Outlook, Malawi’s positive outlook will depend on improvements in rain fed agriculture, macroeconomic management and fundamentals, recovery in global demand and commodity prices, and reforms enhancing foreign direct investment.
“Although all currencies are expected to depreciate for various reasons, changes are moderate. Only Malawi’s will change more than five percent, while Angola’s has been deliberately depreciated to reduce misalignments. The relatively large depreciations in Angola, Malawi, and Mozambique in 2019 will partly be caused by expected large current account deficits,” reads the report in part.
With growth projected at 4.6 percent and inflation at 7.7 percent, the bank said fiscal reforms which include reducing the relatively high borrowing and budget deficit, repealing the industrial rebate scheme, removing tax holidays, strengthening tax administration, and limiting nonessential recurrent spending, augmented by the Malawi Growth and Development Strategy (MGDS) III, favour a positive outlook.
“The economy continues to grow, while inflation remains on a declining trend. Over the medium to long-term, growth will be backed by improved electricity generation, better irrigation infrastructure and cropping techniques, greater access to finance, and a stronger business climate,” the bank predicts.
Last month, Reserve Bank of Malawi (RBM) spokesperson Mbane Ngwira disputed the projected kwacha decline, saying it remains upbeat that the local unit will remain stable going forward because Treasury has assured that expenditure towards elections will be within the budgeted figures.
A depreciation of the local currency could make importers directly feel the pinch as they will be forced to source more kwachas to purchase a unit of a foreign currency, especially the dollar.
However, such a depreciation in the medium to long-term could culminate into higher import costs and relatively cheap domestic exports on the international market; hence, boosting the country’s export growth and lower the trade gap—the gap between total value of imports and exports.
In February 2019, the kwacha marginally depreciated against the dollar and the British pound, but the local unit appreciated against the South African rand and euro.
Through the MGDS III, government hopes to maintain single-digit inflation at 7.1 percent and a growth rate of seven percent in the next five years.