What next for the Malawi Kwacha?

Alan Laverock,
Bananabox Trust

“Malawi has been beset by devaluations over the 15+ years I have been going there and this seems if anything to be accelerating. I have frequently been asked if I think there is a risk of hyper-inflation, much as happened in Zimbabwe some years ago.

In 2008, one pound got you 250mk. The official bank rate now is around 2,250. Using specialist apps, it is possible to get over 3,000 and in at least one instance, more than 5,000.
There have been two large devaluations in recent years, 30% and 44%. The official inflation rate is slightly under 30%. In the USA, inflation is 3%. That 27% difference puts continuous pressure on the exchange rate with the dollar and, consequently, the pound. There have been rumours of a further 30% devaluation for some months now. Possibly, this has been held back until the election has been held later this year.

Devaluation is not supposed to affect prices in country. However, the knee-jerk (and understandable) reaction is for locals to increase prices. Income doesn’t increase, however, and this makes many day-to-day items unaffordable. It means that local people are priced out of buying even the most basic of goods. Most Malawians, especially those in the communities, are already leading very basic existences.

Imported goods are paid for in dollars; a devaluation has a direct and immediate impact. This affects such as fuel, fertiliser, cooking oil, cement and many goods brought into the country to sell in supermarkets. All this, of course, fuels the inflation rate. All goods have to be transported so an increase in fuel costs feeds into other prices.

One of Malawi’s prime sources of income is via overseas aid budgets. USAID of course has recently announced a wholesale cut in awards; UKaid was cut from 0.7% of GDP to 0.5, and has just announced a further cut to 0.3%. Without getting into the politics behind these decisions, they will put huge pressure on Malawi’s already fragile economy. In particular, when there is a shortage of maize, these agencies have paid for the purchase and transport of bulk supplies from countries such as Brazil. Who is going to pay in future?

There are forex restrictions in Malawi. This means that it is not legal (or possible) to transfer forex out the country, such as paying for bills overseas. To add to this, the Government of Malawi is trying to introduce a rule that any forex must be transferred to the central bank so that fuel, etc, bills can be paid. It is now very difficult for a private company/individual to settle for imported goods. All this paints a very bleak future for Malawi.

We at Bananabox do not employ economists nor do we have a crystal ball! We can’t see any further into the future than anyone else. We cannot tell if there will be hyperinflation in the near future. But it is clear that it is becoming more and more difficult to do business.
One thing is certain; it is not wise to hold large sums of kwacha in Malawi at present. There is a huge danger of a further devaluation which will erode the value of such holdings.
The work being done by so many members of SMP is even more important now than, arguably, at any time in the past. If Malawi is to avoid an economic implosion, it will require wise decisions by the government, by many local people, and by NGOs.”