Malawi: Feeling the pinch of a shrinking kwacha

The continuing depreciation of the Malawian kwacha is driving up the cost of living and increasing social tension in the country. The currency fell from K410 to the US dollar in September to K520 to the dollar in December.

Government staff have gone on strike to demand higher wages in response to rising inflation. In November, employees at the national judiciary began a sit-in, demanding a 45% salary increase, paralysing the courts. At press time, that strike was still ongoing, with the government maintaining that it cannot afford the raise.

Later that month, workers at the National Food Reserve Agency also went on strike, demanding a similar salary increment.

The Immigration Department has tripled the cost of processing Malawi passports. The Malawi Energy Regulatory Authority has attributed its recent 6% increase in the price of fuel to the kwacha’s depreciation.

Malawi’s tobacco marketing season closed in September. Sales of the crop make up 70% of the country’s foreign exchange earnings, and there are often hard currency shortages during the “lean season” that follows.

Nico Asset Managers, a local advisory firm, forecast that the kwacha would continue to depreciate until the end of the lean period in February 2015.

The International Monetary Fund, which concluded a visit to the country in November, said that while the current depreciation is in part seasonal due to the lack of foreign exchange receipts from tobacco, the situation has been compounded by ongoing shortfalls in budget support from the international community.

Last year, donor nations and international agencies froze budget support worth around $150 million to the government following the so-called “Cashgate” scandal. An audit of national finances showed that around $60m had been skimmed from government funds.

Western donors provide around 40% of Malawi’s national budget, and although some funds are now flowing back to the country after its partners relaxed their sanctions, the hole in government finances remains acute.

On the conclusion of its November visit to Malawi, the head of the IMF mission Oral Williams said that the shortfalls in international budget support had driven the government to take on costly domestic finance and to accumulate debt locally.

The IMF advised the government to exercise greater control over public spending and to maintain fiscal discipline, so as to support monetary policy and reduce the impact of inflation on the poorest segments of society. The inflation rate in 2013 hit 28.3%.

Finance Minister Goodall Gondwe said although the rate at which the currency has been depreciating is shocking, the fall is not a strange scenario in Malawi. He cited the devaluation of the kwacha in 2012, when the country removed the currency’s peg to the US dollar. The currency slid from 168 kwacha to the dollar to 460.

“We coped that time and we will cope now,” he said. Gondwe said the government working on both short- and long-term solutions to slow the depreciation. He said the government is looking for resources to fill in the gaps created by the donor aid freeze to bring into the market to increase the demand for the kwacha.

“In the long term, Malawians will have to work hard, to diversify and produce more products to export. Everybody knows that.”