30% of the $102 million aid that the International Monetary Fund dedicated to Malawi will be directed towards the 2021 financial budget in order to shore up the issues caused by the recent pandemic. The remainder of the foreign aid will be dedicated to the Balance of Payments and provide financial assistance to communities struck by the COVID-19 pandemic. Roughly $31 being dedicated to the country’s economy could be a breath of fresh air for millions of people stuck in financial uncertainty during closed companies and restricted entrepreneurial jobs within both urban and rural areas of Malawi.
Williams Banda, a spokesperson for the Ministry of Finance also commented that this is not the only foreign aid that Malawi will be receiving in the remainder of 2020. There are numerous other donors waiting to transact the funds in order to support the local government in stabilizing the country’s situation for both the short-term and the long-term.
Unfortunately, Banda did not disclose the identities of these donors, mentioning that it is quite premature at the moment, birthing several conspiracy theories on who could be the people siphoning money towards Malawi. Many politicians and residents of Malawi think it may be a donation from China as an attempt to strengthen its already firm position on the African continent, but at this point, it’s just speculation with no basis to it. We will have to wait until the identities are disclosed.
Affect on the local economy
Converting the foreign aid we see that nearly 1.412 billion Kwacha is being dedicated to the 2021 budget. Considering the already approved 2.1 trillion Kwacha budget it’s not as much as many would hope for from the IMF, but the organization is stretched thin as well. The $100 million “donation” is also being given to other African nations totaling billions in donated funds across the continent.
In terms of the local economy, nothing much is expected to change from this donation. Sure, there will be some upticks but nothing significant. Malawi, like many other African nations, needs to go through rigorous several years in the future or building its economy back up. The sooner it starts doing so the more likely will it be to attract further FDI in the future.
In terms of the currency itself, forex experts in the country predict a quick uptick in Kwacha relative to the USD but a relatively fast stabilization as well. In fact, this IMF donation was part of traders’ daily signals when it was announced on the 19th, giving many the edge over other traders. Pairing this up with other tools for making a trade decision in FX, many traders are more than prepared for the upcoming appreciation of the Kwacha regardless of how small it may be.
Considering that further donations are similar in volume, it is actually likely for the uptick to continue for a further few weeks, only correcting itself once metrics about the consumer spending index during Christmas time hits the market.
It is expected that due to the decreased consumer spending volume, all of the world will see a major downturn in both stock prices and currency strength. Only China seems to be handling this issue well as very few cases are being discovered every day and most of its economy is open again. The same goes for New Zealand as well.
But considering that China is an exporting country, it could directly affect them as well, should other countries not take control of the situation by December.
Despite the donations coming towards Malawi and the relatively large 2021 budget, Felix Mlusu, the minister of Finance mentioned that there is still more than a 750 billion Kwacha deficit. This could lead to several locations in the country being prioritized over others, leading to further pandemic spreads and difficulties of economic recovery.
But judging by the state the world is in at the moment, a helping hand is not something that is likely.
Due to these issues, Malawi may be forced to seek further borrowing opportunities. This is where it starts entering dangerous waters. These borrowed funds will not be dedicated to building new sources of income but towards rebuilding the old. Adding a further 750 billion Kwacha to the already overflowing debt pile could spell serious trouble for Malawi.
Lenders should also be considered. Events may play out that only China becomes a viable option for borrowing, potentially leading to the same issues as in Kenya and many other African countries.
But without these funds, Malawi may face nearly a decade of rebuilding process further dropping the economy to its knees. Regardless of the situation, the government needs to somehow shore up its deficits. For the general population itself, the only change could be the hike of taxes or the introduction of new ones, but other than that no major changes should be expected.