A crisis awaits the Malawi economy that will make it hard for authorities to buy critical imports between now and the lean period beginning December due to dwindling foreign currency reserves, economists have said.
Malawi requires a minimum of three months worth of import cover which is internationally recommended or about $129 million (K39 billion) a month to satisfy its import needs such as fertiliser, fuel and medical drugs.
Yet, data from the Reserve Bank of Malawi (RBM) show that gross foreign exchange reserves, as at September 14 2012, stood at $397 million (K120 billion), an equivalent of 2.1 months worth of import cover, down from $404 million (K122 billion), an equivalent of 2.15 months worth of import cover the week before.
Of the reserves, $180 million (K54.5 billion) or 0.96 months worth of import cover, was sitting with authorities mainly used for supporting the kwacha while $217 million (K65.7 billion) or 1.15 months worth of import cover was with the private sector, which can be used to buy essential imports.
Economists have, however, said the trend is worrisome coming at a time when the tobacco market, which did not perform as expected this season, has closed and its earnings slumped by 40 percent to $176.8 million (K54 billion) from last year’s $293 million (K89 billion).
It also comes at a time when aid inflows, whose contribution accounts for 30 percent of the national budget and the second most important forex source after tobacco, have not been satisfactory.
Ben Kaluwa, an economics professor at the University of Malawi’s Chancellor College, on Monday said the dwindling foreign currency position entails that Malawi is sitting on a ‘dangerous position’.
“This is really bad and it is dangerous. Right now, we have sold everything that gives us substantial amount of foreign currency. And with the donors withholding their budgetary support, this is really a crisis,†said Kaluwa.
He observed that it is difficult to fathom what authorities will do to remedy the situation between now and the next harvesting season when the country needs foreign currency to buy fertiliser for the next crop growing season.
Kaluwa said this means that government will have to resort to borrowing to buy petroleum products.
For more than three years, Malawi has struggled to raise enough currency to buy critical imports, a situation that resulted in fuel importing companies failing to procure the commodity. This resulted in long queues slowing down business.
The private sector has also been failing to buy necessary raw materials for their production purpose; hence, affecting their businesses as well.
Money market analyst James Chikavu Nyirenda said after the closure of the tobacco season, the decline in reserves was expected.
“Malawians should brace for even harder times as demand for foreign exchange peaks towards the year-end in readiness for the festive season and the 2013/14 agricultural season,†he explained.
Nyirenda noted that based on sentiments expressed by most of the country’s major donors and Common Approach to Budgetary Support (Cabs) partners, it is evident that no substantial support will be released to the country, perhaps until the first quarter [January-March] of 2013, depending on accountability and governance issues. “Unfortunately, the goal posts could keep changing without any guarantees of support as our friends also grapple with their own economic woes in addition to legitimate concerns and conditionalities before disbursement of the promised and much-needed aid,†he said.
Nyirenda, however, said having been reduced to beggars, Malawi has found itself in a position where it cannot choose when support should be made available to avoid economic catastrophe.
It is time Malawi authorities started looking inward and critically investigated effective measures to support the economy in the absence of donor support, he said.
“Unless firm benchmarks are agreed, donors and other partners could hold-out for as long as they want,†he warned.
Minister of Finance Dr. Ken Lipenga could not be reached for a comment on Monday.
But the lack of foreign currency reserves has grave consequences on the free-floating exchange rate regime adopted on May 7 2012 as part of wider reforms under the International Monetary Fund (IMF) Extended Credit Facility (ECF) amounting.
According to Nico Asset Managers Limited weekly market update, the kwacha last week recorded 1.06 percent depreciation to K295.8 per US dollar from K292.7 per US dollar in the previous week, as the trend is likely to go on due to shortage of forex.
Since the liberalisation of the kwacha in May 2012, the local unit has continued to weaken against the US dollar. The local currency may have weakened by as much as 20 percent since 49 percent devaluation to K250 in May.
According to economists, a flexible exchange rate requires enough foreign currency reserves to support it.
Normally, between September and February next year, it is traditionally a lean period for foreign exchange earnings for Malawi.
