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| Business |
| Forex shortage to push inflation up |
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by
Ayam Maeresa, 18 March 2003
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Commercial banks have said low foreign exchange reserves, estimated at K11.7 billion (US$129.1 million) or two months worth of import cover at the end of last month, are likely to cause a rise in inflation as pressure on the embattled kwacha increases.
But they said pressure on the local currency, a result of low supply in the market, will be less in the short to medium term as yields from tobacco sales, which started last week, take effect.
The kwacha has fallen by more than a third in the last six to seven months hit by a persistent dry spell of foreign aid that is crucial to the country’s economic well being.
Donors, taking a cue from the International Monetary Fund (IMF) which suspended an economic programme with the country two years ago by freezing a total of US$47 million (K4.2 billion) for budgetary support, are withholding a total of US$75 million (K6.8 billion).
Donors accused government of failing to tame its high expenditure, ignoring pro-poor sectors and dragging feet on high level corruption cases.
“The economy is experiencing shortages of foreign exchange attributable to rising demand in an environment of dwindling supply,” said Loita Investment Bank in its latest market analysis report. “This is a worrisome development in that if allowed to persist, it could result in rising inflation.”
The bank said the slump in the value of the kwacha, which by yesterday was trading at K91.00 to the US dollar, has been associated with rising fuel prices, which, in turn, have increased the cost of producing commodities in the industries.
According to the Commercial Bank of Malawi’s (CBM) latest report on the economy, foreign exchange reserves have fallen from about K13.3 billion or 2.4 months of import cover in January.
“The weakness of the kwacha is a reflection of the dwindling foreign exchange reserves,” said the CBM.
Save for food and other household obligations that saw an increase in prices, other commodities in the consumer basket dropped in prices by varying degrees because of free maize being distributed by government and other organisations that has kept the price of commercial maize low, the CBM said. Inflation dropped to 10.7 percent in January from 11.5 in December.
The National Bank of Malawi (NB) said two weeks ago that the kwacha will not hold this year even if funds from tobacco start flowing as it is likely to be hit by uncertainties on donor aid soon after the selling season.
“The trend [of depreciating] is expected to continue even during the tobacco marketing season because the rate may be determined more by uncertainties surrounding the absence of sources of foreign exchange immediately after the marketing season is over than the availability of foreign exchange during the selling period,” added the bank.
Tobacco accounts for about 75 percent of the total foreign exchange earnings and last year the Tobacco Control Commission (TCC) said the industry earned the country K14 billion (US$160 million).
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