The World Bank has warned that the continued stability of the local currency could be a recipe for trouble as it may reduce the country’s competitiveness on the global market.
The Bretton Woods institution gave the warning in its 10th edition of the Malawi Economic Monitor (MEM) titled Strengthening Human Capital Through Nutrition, released in Lilongwe on Thursday.
MEM is a biannual publication by the World Bank Malawi office, which provides an analysis of economic and structural development issues in Malawi.
Reads the report in part: “While generally a stable kwacha supports business confidence, it has, however, contributed to real exchange rate appreciation, which could reduce competitiveness and supports higher levels of import.”
Currency appreciation usually reduces inflation because imports become cheaper and the lower prices lead to lower inflation.
However, appreciation of the currency makes imports more attractive, causing the demand for local products to fall, thereby widening the gap between imports and exports.
After depreciating by six percentrelative to the dollar in the second quarter of 2019, the kwacha regained most of its ground by mid-August.
Since then, the currency has remained stable, trading at an average of K740 to a dollar.
The volatility of the kwacha, mainly between May and June 2019, was attributed to importers frontloading orders ahead of May 21 Tripartite Elections, election-related speculation and also a slow start to the tobacco market.
The depreciation was also partly on account of a slow flow of funds for donor-funded projects during the elections, according to the World Bank.
“RBM also tightened foreign exchange rate bureau trading regulations in September 2019, with stiffer penalties for speculative behaviour and trading beyond specified bands,” reads the report.
On the overall economy, the World Bank says the domestic economy is projected to grow by 4.4 percent in 2019, up from 3.5 percent in 2018.
It says agriculture activity rebounded in 2019 due to favourable weather conditions, which it says offset the negative effects of Cyclone Idai, especially in Southern Region.
Speaking during the dissemination of the report, World Bank country manager for Malawi Greg Toulmin noted that with sustained growth in agriculture and energy investments expected to improve electricity availability, economic growth could pick up to 4.8 percent next year and to 5.5 percent thereafter.
“Although inflation has remained in single digits, pressures are emerging from increased food prices.
“On the positive side, non-food inflation has remained low supported by relative exchange rate stability. However, the recent increase in fuel prices poses an upward risk,” he said.
Last week, Reserve Bank of Malawi Governor DalitsoKabambe stressed that currently, exchange rate remains on balance at its equilibrium, a position which he said was attained in August 2016.