Malawi is no stranger to foreign exchange shortages and fluctuations in value. This has been the situation for some time now and will likely continue as long as there is no paradigm shift in the manner we do business.
Figures from the Reserve Bank of Malawi (RBM) show that Malawi requires $3 billion per year to meet imports requirement. How much of the $3 billion for imports does Malawi generate? The answer is about $1 billion. This means that there is a $2 billion deficit or shortfall. This is where the problem begins!
In a recent presentation, RBM director of financial markets Kisu Simwaka painted the picture much clearer when he said the foreign exchange the country generates is only enough to cover 33 percent or one third of the import needs. He asked the question: Where does the 67 percent come from?
Each month, Malawi spends an average of $250 million for imports. Thus, at $197.1 million this year, annual revenue from tobacco, the country’s major foreign exchange earner, is not even enough to cover one month’s import bill.
Earlier this month, gross official reserves as held by RBM stood at $521.87 million or two months of import cover, one month shy of the internationally recommended minimum of three months. Private sector reserves, on the other hand, were at $386 million or one-and-a-half months cover.
The law of demand and supply of goods and services in an economy illustrates better the situation Malawi and many other countries find themselves in. To earn forex, a country has to export more goods and services than it imports. The more the exports, the more the foreign exchange in the bag to be used in importing essential goods and services such as pharmaceuticals, fuel, construction materials, industrial and motor vehicle spare parts as well as consumer goods.
But that is not the case with Malawi. Its trade deficit keeps widening as the country imports more than it exports, always subtracting and not adding on a net basis.
The excess demand for forex has left the kwacha losing six percent in value since January this year requiring one to raise K824 to buy one dollar from K761 in December 2020.
It is not surprising really given the narrow forex base that largely banks on agricultural produce such as tobacco, tea, legumes and sugar. Remittances from citizens in the Diaspora as well as injections from multilateral financial institutions such as the World Bank, the International Monetary Fund and our own African Development Bank also provide relief.
In the past year or so, the Covid-19 pandemic slowed down global economic activity and shrunk remittances by 26 percent. Malawi’s exports also declined by 16 percent to $900 million against a four percent drop in imports to $2.7 billion.
To fill the forex gap, during the Democratic Progressive Party administration RBM entered into a currency swap deal or basically a loan with the African Export-Import Bank. However, the deal was abruptly terminated mid last year, forming the genesis of the prevailing precarious foreign currency situation as RBM now has to pay the $450 million, a tall order, I must say.
The swap deals provided a comfortable reservoir of foreign currency, enabling RBM to easily intervene on the market and pay for key imports.
To a larger extent, the perpetual forex shortages reflect our authorities’ penchant for quick-fix solutions to resolve complex issues at the expense of sustainable lasting solutions. Not helpful as it only briefly eases the pain, but does not heal the wound.
Unless there is a balance in terms of supply and demand or better still supply exceeding demand, foreign currency will continue to be scarce and our beloved kwacha will forever get battered left, right and centre. In the end, meaningful stability will remain a pipedream.
To quote Vice-President Saulos Chilima during the launch of the World Bank’s latest Country Private Sector Diagnostics report themed The Road to Recovery: Turning Crisis into Economic Opportunity in Lilongwe recently, “let there be no spectators or Monday coaches” in the pursuit to generate foreign exchange.
For every dollar spent importing tomatoes, toothpicks and the like, we should individually ask ourselves how much foreign exchange we have generated.
It is high time we respected and appreciated our resource constraints and use such scarce resources efficiently and effectively.