When Joyce Banda became president of Malawi following the untimely death of Bingu wa Mutharika, she quickly went about reversing many of her predecessor’s economic policies. By the time of his death, President Mutharika had largely fallen out with the donor community and was refusing to accept conditions imposed by the International Monetary Fund (IMF).
Western Donors, among them the UK, US and Germany had frozen their assistance, worth a total of $1 billion, to the country. And the absence of aid inflow, which once contributed 40% to its annual budget, contributed to fuel shortages and a sharp decline in foreign trade.
President Joyce Banda subscribed to the recomendations to reassure Malawi’s Western donors. She caved in and devalued the kwacha, something Mutharika had vehemently refused to do. Mutharika had reasoned it would have devastating effects on the populace and had pointed to the 10% devaluation he made upon instruction from the IMF in 2011 which resulted in a sharp increase in the prices of goods and services.
On taking office, however, Banda who wanted to appease the donors saw these short-term dangers as necessary. Banda devalued the kwacha by almost 50%, well above the 30% suggested by the IMF mission which had visited the country just before Mutharika’s death, claiming the action was the only route to get the economy back on track.
The cost of basic goods rose dramatically and commentators warned of dire consequences unless the government devised measures to cushion the impact. Such predictions seem to have been vindicated, with the rising prices and falling living standards her predecessor had warned of becoming starkly apparent to ordinary Malawians.
A Household survey found that 52.2% of the country’s population is now in poverty, surviving on less than a dollar a day. Meanwhile, the number in the most extreme poverty, surviving on less than 10 cents a day, has increased from 22% to 25%.
Today economist many of whom did not support Bingu are warning that Malawians should brace for tougher times ahead as the value of the Kwacha continues to decline against major foreign currencies.
Zodiak Radio is reporting that Executive member of the Economics Association of Malawi (Ecama) who is also Country Director for Innovations for Poverty Action (IPA) Dr. Thomas Chataghalala Munthali says the Kwacha is likely to continue getting the heat for sometime.
From K380 at the close of the local tobacco market season in September, the Kwacha is now trading at K440 to the dollar.
According to the article posted on Zodiak website, Dr. Munthali observed that the on-going trend implies that buying power for Kwacha users would continue to dwindle and consequently the cost of living for the majority of Malawians will equally be affected.
“The local currency has continued to be weak on the market and this would have an impact on the economy at large.
“As we are in the lean season where the country faces challenges in forex earning, the time mostly coincides (with) a time when the country’s import demand increases and this would affect the economy,” he said.
The trend in Malawi is such that during the lean period when the Kwacha tumbles, forex reserves also shrink.
According to figures sourced from the Central Bank, Malawi reserves are now pegged at 2.31 months worth of import cover, slightly lower than the internationally recommended three months.
On this, Dr. Munthali was quick to warn APM’s government to desist from the tendency of “unnecessary expenditure” saying such checks would prevent the economy from facing possible shocks.
He further expressed optimism that Central Bank would ensure that the strength of the Kwacha would continue to be determined by market forces.