Tobacco woes worsen in 2020

Earnings from tobacco, the country’s main foreign exchange earner, have continued to decline over the years. This year, it was no different.

In 2020, Malawi raked in $174.97 million (about K131 billion) from the green gold, which was 27 percent below the $237 million (about K178 billion) realised during the previous year’s growing season.

This came against a 32 percent shrink in the final output to 114 million kilogrammes (kg) sold this year from 165 million kg in 2019.

In 2020, the country sold 112.89 million kg of tobacco compared to 165.67 million kg  sold in 2019.

Compared to 2019, the leaf fetched better prices this year with a kg selling at an average of $1.54 (about K1 155) compared to $1.43 (about 1 073) in 2019.

Again, falling earnings from tobacco, which accounts for about 50 percent of Malawi’s total foreign currency earnings and roughly 15 percent of gross domestic product (GDP), was bad news to the foreign exchange buffer.

At this rate, the earnings were

 enough to keep the foreign exchange buffer for 25 days, with the country’s import bill estimated at around $210 million (about K158 billion) per month.

However, even during the market season, foreign exchange was in short supply, a situation that destabilised the local unit, resulting in its losing value.

Despite tobacco being the country’s top forex earner, its contribution to the forex buffer has been falling sharply in the past 10 years in response to changes in prices and weather conditions, and most recently, due to the global anti-smoking campaign championed by the World Health Organisation Framework Convention on Tobacco Control (WHO-FCTC).

Figures from the National Statistical Office (NSO) indicate that the country’s tobacco earnings have declined by about 45 percent over a 10-year period from $433 million (about K325 billion) in 2009 to $237 million in 2019.

Rumphi-based tobacco grower Charity Kaunda testifies that this year has not been good.

She had 10 bales of burley tobacco, but in addition to fetching poor prices, high rejection rate had also done her no good.

Said Kaunda: “On average, I sold my tobacco at an average price of K1 100 per kg, but most of my tobacco was rejected. As a result, I had to sell again, but much lower price of K900 per kg.

“But looking back to when I started in early 2000s, there was more competition on the market and prices were better. We can only hope for the better next season.”

AHL Group figures indicate that burley tobacco on auction market suffered an average of 66 percent of no-sale rejection, which is 38 percent higher than last year.

Tama Farmers Trust chief executive officer Nixon Lita said in an interview that the biggest challenge in the year was high rejection rate on auction sales, which went above 70 percent against the recommended minimum of 25 percent.

He said expecting 155 million kg output and ending up with 40 million kg less was a big blow to the industry.

“Tobacco industry needs to research on why to research on why production levels went down in 2020 when export demand was high,” he said.

Initially, Tobacco Commission, the regulatory body, had anticipated producing around 154 million kg of the leaf this season, but the country ended up producing just around 112 million kg, largely attributed to poor weather, especially excessive rains immediately after the second round of crop estimates.

Again, around November 2019, the United States Government announced Withhold and Release Order, which meant that tobacco from Malawi going into US had to be withheld before being allowed entry following allegations of child and forced labour in the country’s tobacco value chain.

When the news broke, it discouraged some growers, resulting in lower volumes on the market.

Amid poor volumes and the Covid-19 pandemic, the Reserve Bank of Malawi (RBM) conceded that the forex market continued to experience supply shortages.

RBM Governor Wilson Banda observed that the amount of foreign exchange generated from tobacco was lower than was the situation last year.

He said: “What is making matters even worse is that our supply lines and export root are disrupted and this is having a direct impact on forex supply.

“Against that, we have growing demand arising from Covid-19-related imports, which has created a mismatch in supply and demand, thereby exerting pressure on balance of payments and the exchange rate. That is why you saw from July the exchange rate trying to give way.”

Banda said the central bank is committed to maintaining exchange rate flexibility to help absorb external shocks.

RBM figures showed that from June 2020 to October 2020, the local unit has depreciated by 2.2 percent to K759.47 per dollar as of end October 2020 from K743.05 in June 2020.

In October, gross official reserves improved to $624.6 million (three months of imports) compared to $533.4 million (2.6 months of imports) recorded in September 2020.

The increase in reserves in October reflected receipt of the second disbursement by the International Monetary Fund (IMF) under Rapid Credit Facility as well as budgetary support to address critical spending needs in respect of the Covid-19 pandemic.

However, despite the inflows, the local unit continued to depreciate against other currencies in October.

For example, against the dollar, the kwacha lost 0.3 percent and traded at K759.47 at the end of October 2020, reflecting largely insufficient supply of foreign exchange to meet the demand.

TC board chairperson Harry Mkandawire observed that anti-smoking campaigns, the Covid-19 pandemic and low prices being offered by buyers contributed to reduced tobacco output in the country.