Malawi economists push for devaluation of currency
In Malawi, pressure is mounting from economists who are pushing the government to devalue the currency, the kwacha. Some say it’s an appropriate response to the devaluation of major currencies such as the US dollar and the British Pound sterling. But President Bingu wa Mutharika refuses.
The kwacha recently traded at MK140 against the US dollar. It’s been steady at that rate for the past three years, and local economists say that’s bad for the economy. They say continuing to peg the kwacha to a major currency, especially the dollar, is a recipe for disaster.
They say it has created a booming parallel, or black market, where there’s a better exchange rate– up to 50 kwacha more per dollar. Some analysts say the black market rate is the true value of the kwacha and that de-linking it from the dollar will help reduce Malawi’s chronic shortage of foreign reserves. Since last year the country has been hit by foreign exchange shortages.
The president of the Economics Association of Malawi, Thomas Munthali, says the strong kwacha has been hurting the economy by making Malawi exports more expensive for foreign customers.
Munthali said the kwacha should be devalued by about 25 kwacha to about K167to the dollar. The advice was part of his presentation at a recent workshop on the budget in the capital, Lilongwe. He said currently the exchange rate is overvalued by about 19 percent.
The World Bank agrees and is calling on the government to devalue the kwacha.
Tim Gilbo is the Malawi World Bank country representative. A local daily newspaper recently quoted him as supporting the call for devaluation. He said it could shield the country from major global shocks, especially during the current global financial meltdown.
Gilbo said in many countries, the public tends to perceive weak currencies as bad. But he said a weak Kwacha would actually improve Malawi’s competitiveness on the global market. As an example, Gilbo cited his native Australia, which he said devalued its currency in 1997 by almost 50 percent. He said the move has helped the country withstand the current financial crisis by making its exports cheaper.
But President Mutharika says devaluation would help those few who are hoarding US dollars. “The devaluation of Kwacha will only benefit a few individuals,” particularly non-Africans, he says. “They want to push [it], because they [will] go to the market and convert the kwacha to US dollars and keep it. Suppose we devalue, they will quickly off-load their dollars, make huge sums of money (out of that). These are the ones to benefit.”
So President Mutharika said he will not support the move. “I have resisted devaluation and will continue to resist devaluation, because I need to give the business community and everybody in Malawi a stable foreign exchange regime. And I am an economist. I understand and follow what is happening around the world. I am not going to devalue the kwacha to please one or two people,” he says.
But the Malawi Confederation of Chambers of Commerce and Industry, which supports devaluation, is calling on the government to make more dollars available to the commercial banking system. Economists say this can be done in part by cracking down on the black market and unlicensed foreign exchange bureaus.
Executive director of the confederation, Chancellor Kaferapanjira, said that should help the government maintain the value of the kwacha. –VOA
Why cant the exporters among other ways making their exports cheaper thereby competitive on the world market by increasing their production efficiency. As many people have commented before why hasn’t the numerous previous devaluations made Malawi exports cheaper? It is a big no. World Bank and IMF have a big problem of always prescribing a one size fit all solution. How can they give the same solution to a net exporting country and net importing country.
As for black market, it will always be there whether devaluation or no devaluation. Want a living example, Zimbabwe. I cant be believe shallow thinking that black market rate is because of overvaluation of Malawi Kwacha.
LONG LIVE DOLLAR PEGGING
I do believe the problem of Zimbabwe extends to the neighboring countries. The leader of Zimbabwe shares the blame which I personally feel it’s mainly the west with that mind set to control as if we are just ponies on Chess board. With this economic crisis, the Southern African Nation will also have much effect considering the situation in Zimbabwe.
SADC!? EU really works like a block that even those countries after fall of USSR which were economically poor by that time and now have improved drastically but African countries are not, looking more at domestic, but I wonder where domestic margins ends, because strong neighbors economically will most likely improve domestic economy.
Just stick to that Bingu.Alot of crooks are waiting to make much gains out of that.Alot of Malwians are poor and cant afford the effect of the devaluation.
Text book economics gives us assumptions for the devaluation to work. would they hold true for Malawi? This is reality. malawi does not produce a highly demanded unique product. What we produce other countries produce as well and even better products in most cases. We should not forget that most of our trade deals are based on compassion and not competition. this is the painful truth..someone has pointed out that the net effect of devaluation on the economy may not be desirable. The very companies who may claim to benefit from that move will not even raise the wages of its employees! thats just one example.
no need to devalue the kwacha. how come we are surviving? Kwacha woye!