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| Business |
| Malawi’s trade deficit to widen |
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by
Ephraim Munthali, 07 July 2004
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19:37:44
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Low export volumes and depressed agricultural commodity prices on the international market are expected to widen Malawi’s trade deficit, painting a grim picture of the country’s macroeconomic climate in the short and long term.
In its mid year economic review on Malawi released recently, Standard Bank of South Africa blamed the development on poor rains which affected crop production, especially in the Southern parts of the country.
The report said low agricultural output may result in increased food imports to fill the deficit, draining foreign currency which the Reserve Bank of Malawi has already described as very low.
According to the bank, the erratic rainfall is also expected to lower commercial agricultural output, forcing the export volumes to tumble.
The bank has since warned that Malawi’s dependence on agriculture will continue to negatively affect her international trade, making economic growth a pipe dream.
Analysts say reduced export volumes of Malawi’s key exports of sugar and tobacco due to poor rainfall and low global prices last year, resulted in the country’s failure to meaningfully reduce her trade imbalance.
[Malawi’s] external position will always be susceptible to global agricultural commodity prices unless efforts to diversify the country’s economic base are deepened,” said the report.
Last year, a high crop production helped modestly cut Malawi’s trade gap from K14 billion to K13 billion in 2002 since the country did not import a lot of maize, according to Malawi Investment Promotion Agency (Mipa).
But this year, Malawi has a maize deficit of 600,000 metric tonnes while rice production is expected to retreat six percent—meaning that a large proportion of the foreign currency will have to be used to import food and cover the gaps.
The bank said that with negligible financial flows, a weak services account and the absence of donor aid, the country’s overall balance of payment position means that the kwacha will be under “considerable pressure.”
It said while tobacco may bring temporary relief on the kwacha, midterm support for the currency could only be gained if donors release money in form of grants and soft loans which can be used to offset the “expensive” public debt.
“However, sustainable long term support for the kwacha will only be secured by improvements in Malawi’s terms of trade,” argued the bank.
With the kwacha expected to fall, Standard Bank says the development could negatively affect the inflation outcome.
The National Statistical Office (NSO) forecasts the kwacha to close the year at K115 against the US dollar while annual inflation is projected to close at 12 percent.
Inflation is currently at 11.3 percent while the kwacha is trading at K110 to the green buck.
With inflation showing signs of rising, Standard Bank analyst for Malawi Robert Bunyi said in an e-mail that the recent sharp and rapid reduction in interest rates may not be sustainable owing to developments on the inflation front.
“Interest rates have been reduced prematurely in our view but lower lending rates will require reduced borrowing by the government,” said Bunyi.
To the new administration of President Bingu Mutharika, the macroeconomic developments means that the government will have to realign its fiscal stance if talks of improving the business climate are to turn into reality.
In addition, a number of reforms will have to be undertaken by government if Malawi is to achieve higher and sustainable growth rates.
“In particular, measures to improve access to inputs for the agricultural sector will be crucial to increase average yields,” said the report.
In his speech during the 40th independence celebrations held in Lilongwe on Tuesday, Mutharika said his government is working out modalities to lower the costs of farm inputs in order to boost agricultural production.
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