THE Malawi Kwacha has been relatively stable, with a marginal depreciation of 0.05% against the US Dollar in February 2018 from the previous month, thereby maintaining the trend that lasted for most of 2017.
The Kwacha is expected to remain stable in the short term due to continued availability of foreign exchange reserves, which are adequate to cushion the foreign exchange market and guard against the Kwacha volatility.
In the medium to long term, the Kwacha is expected to depreciate if the current downward trend in tobacco revenues is sustained as this would entail low forex reserves generated from tobacco sales.The Kwacha is also expected to depreciate in the medium to long term on account of significant current account deficits and weak foreign direct investment inflows.
Food inflationary pressures have been reported since end January 2018 due to increase in maize prices. In the short term, food inflationary pressures are likely to continue driven by speculation that the dry spell and infestation of crops by fall army worms that is threatening this season’s maize output may lead to reduced output.
As the country moves towards the harvesting period which commences in April for most farmers, availability of food may moderate food inflationary pressures. However, this moderation is unlikely to be sustained as the expected output reduction make farmers and traders to hoard their stocks in anticipation of better prices as the demand for the staple crop starts to rise.
Non-food inflation may increase due to a rise in global oil prices as a result of global reduction in oil production and the rising tensions in the Middle East. Other factors that may put pressure on non- food inflation include the demand for wage increases, housing cost increases, increase in electricity tariff and strengthening of the South African Rand which entail high import cost as the country’s imports are dominated by South African products.
The monetary policy rate is expected to be maintained at 16.00% in the short term. Furthermore, the rising food inflationary pressures make a scope for another monetary policy cut in the short term less likely. Interest rates on the interbank market are dependent on the volatility of liquidity and therefore susceptible to change.
Treasury bill yields are expected to remain below the Monetary Policy Rate. Real economic growth is projected at 4.50% in 2018 by the World Bank and 5.00% by the IMF. This growth projection is dependent on a sufficient agricultural output and power supply, a reduction in government borrowing if the national budget is sustained and prudent macroeconomic management to avoid further instability.
The EIU revised the country’s economic growth rate downwards to 4.1% in 2018 from 4.4% in 2017. This downward revision emanates from the likely reduction in maize output this season, expected slow growth in tobacco production, and the industrial sector which is unlikely to emerge as the key driver of growth due to stiff competition.