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
I am in Israel currently, There money is trading between 3.8 and 6.0, official and black market respectively. have they devalued.
Anganya kweni wantithu awa mbakulemera mweee!!! look at the church they built on that holly khola.
Mulibwani ku Malawi….
Economists forget that Malawi’s exports are expensive because of cost of production and distribution is high. The tobacco or other products that are exported have to take into cosideration these high costs. Malawi is landlocked and transportation is inefficient. Devaluation will increase cost of doing business.
Malawi earns very little foreign exchange
and as such devaluation will affect cost of production and the economic well – being of citizens especially villagers and low income groups.
Shortage of foreign currency is being addressed by govt especially by ensuring that Malawi has locally produced food it has lessened demand on foreign currency for importing food.
Devaluation of kwacha will benefit few greedy people do you remember how people got rich from blues after multiparty it was the same issue of devaluation anthu forex akusungira mmanyumba mwao akuganiza za devaluation ovutika ndife anthu wamba inu nonse mabwana palibe chimene mungamve ndalama akayichita devalue sizonse imalipira ndi kampani.
economist dont cheat us! we are better with the same Kwacha… wina ma dollar amuphulikira yekha.. hahahahaha.. amasunga kudikira kuti kwacha will devalue.. Bingu tiyeni nawoni anthu ozikonda awa alire mayemaye..am told kuti amwenye ndi anthu ena ali ndi madola lolololo amadikira zimenezi tsano dala adabwa kuti a Bingu akufuna kuti MK ibwere pa 90 to a dollar. WINA ALIRA WALIRA KALE
pls leave bingu alone , this man knows what hes doing, kwacha nderatu ife amalawi so lets be proud of it , these guys are clever coz they have business outside malawi so the’re trying to use this as an advantage for them to get a living , Akagwere uku, zitsiru ?
Since around Jun-08 to current, the GBP and EUR has devalued against the USD up to the weighted average of about 16%. We saw the USD falling up around 40% against the GBP and EUR in the late 2007. The problem is that the MWK is not freely trading currency so indeed I agree with Bingu that the Govt will decide when to devalue the MWK. Nonetheless, this could and probably is having adverse effects in businesses that trade internationally. I reckon also that the massive imbalance between the black FX market and the official FX market is mainly due to the corresponding imbalance of demand and supply. Again, the Govt has the ultimate power to smoothen the supply/demand imbalance. Again, there mere fact that we import more than we export means that Govt policies on currency rates can not be effectively supported. As Malawians, I reckon we should start to creatively think about what we should offer to the international markets in terms of trade and others that would smoothen the current import/export imbalance for the good of the MWK. Institutions in Malawi which have existed for so long and have been making profits should also start thinking of diversifying internationaly for the good of Malawi.
I entirely agree with you. The big companies in Malawi only want to be big fish in a small pond and cannot try to swim in a bigger pond i.e. going international.
We need Malawi to also have multinationals. All these multinationals we see today they all started small. So Malawi companies wake up.
For example in the banking sector, Banks can’t you see foreign influx of Banks you will soon be crowded out. Don’t be caught flat footed diversify your risk by going international.
I support Bingu let the kwacha trade where it is. By devalueing the kwacha, so many souls will feel the pinch. Everything will go up in prices. Bravo Bingu you are a practical economist not those guys beleiving in theories.
Aaaaaah Gilbo devaluation ya 1997 ikachite help Australia lero 12 years later?
For your self edification and also to help you prepare for your informed discussion:
Devaluation has advantages and disadvantages:
ADVANTAGES:
- Exports become cheaper, more competitive to foreign buyers. Therefore, this provides a boost for domestic demand.
- Higher level of exports should lead to an improvement in the current account deficit.
- Higher exports and aggregate demand can lead to higher rates of economic growth.
DISADVANTAGES:
1. Is likely to cause inflation because:
• Imports more expensive
• AD increases causing demand pull inflation
• Firms / exporters have less incentive to cut costs because they can rely on the devaluation to improve competitiveness
2. Reduces the purchasing power of citizens abroad. e.g. more expensive to holiday in Europe.
3. A large and rapid devaluation may scare off international investors. It makes investors less willing to hold government debt because it is effectively reducing the value of their holdings.
Note: It depends on:
• State of business cycle – In a recession, a devaluation can help boost growth without causing inflation. In a boom a devaluation is more likely to cause inflation
• Elasticity of demand. A devaluation may take a while to improve current account because demand is inelastic in the short term
The alternative to devaluation is dollarization. Dollarization occurs when a country consciously adopts United States dollar as its preferred currency. US dollar can be used in isolation or form a parallel coinage with local currency.
Forms of Dollarization
Full dollarization is generally implemented by countries at transitional economic growth phase- especially those suffering from high inflation. Dollarization may, however, occur in various forms:
-It may occur at official level when a nation stops using local currency and utilizes only US dollars as national currency
-Dollarization may exist in a semi-official form.US dollar is used in local currency transactions- but plays a secondary role to local currency.
-Unofficial dollarization may occur without approval from local government.
It is to be noted that term ‘dollarization’ may include any foreign currency- and not restricted to United States dollar only. While US dollar is used as local currency in countries like Ecuador, Marshall Islands and Panama, Euro currency is used as legal tender in Vatican City, Andorra and Monaco.
Dollarization of a foreign country has both advantages and disadvantages. Advantages of full dollarization include:
ADVANTAGES:
- Full dollarization decrease nation’s risk to currency devaluation and inflation. – Investor confidence in that country increases. A more stable capital market
develops.
- Almost hassle free balance of payments.
- Smoother integration of that country’s economy with global economies.
DISADVANTAGES:
- Nation loses right to control its own monetary policy
- Country’s central bank loses it power to accumulate seigniorage. Seigniorage is profit accrued from coinage issue. United States Federal Reserve in turn garners seigniorage and local government is forced to forgo an income. Country’s Gross Domestic Product (GDP) suffers as a result.
- Central bank of that country forgoes its right as a lender of last resort for its financial network.
- Nation must possess substantial foreign currency reserves to maintain a current account surplus
The floor is now open for discussion.
bayangik@gmail.com
I don’t buy that Dollarization and hope Malawian should not bow to that. Read what is happening in Zimbabwe, they thought a foreign currency is a way out, and now they are thinking of their own currency backed by Gold.
China, Russia and other countries are aiming to find a new world currency not this imperialist US$. Malawi should not become a property of these other developed countries. Change business strategies, we have South America, Asia apart from the colonizers. Multi poplar world is taking root, just be careful or big war out break (which will not necessarily be of weapons) caz there is a lot of mess out there in this world.
Dollarization debate
http://wiki.idebate.org/index.php/Debate:Dollarization
Do you think we are a major trading partner with USA? Do you think those who wrote that site includes other left wing parties or is just western mentality? Why of all currencies in the world should they call this move Dollarization, why not encouraging adapting currencies like Yen or other well known currencies?
I don’t believe US has the heart of all countries, but new forms of controlling the world, and the power is collapsing, changing to other countries. Before US$, other currencies once played a role as world currency, it’s just a matter of time.
Just look at this from that link “Full dollarization can protect countries from currency crises.”
Why are they having this economic crisis? How come they can be having a deficit of several trillions? If it were another country, that will be the end, but the west back them because without US, the west will fall. I believe that page is written by people within that empire, ready to swallow others, extending their geopolitical/economical power.
Anyway, thanks for the link, will go through it later that I can know more of their tricks.
Where did you Nyasatimes toss my thanks to Dr. Bayangi Kaunga?? Sometimes I’m mystified with the way you behave.
I know the book from which u ve copied. dollarisation or no dollarisation. Ife tili pambuyo pa bingu basi.. Ena ayaluka ndi madollar amabisa.. akachita masewera ife ti panga valuation to MK80
Hope that book you know is for Dr. Bayangi Kaunga caz I don’t knows more books as sukulu tinathawila pa zenela and it’s easy to hide something in book that I will most likely not find that treasure.
But that book you know can be interesting to read about dark sides of the world. If people are hiding forex, they will not make money this time from the readings. Keeping Forex this time is just as kusunga nyama ya mbuzi kudikala malonda mpaka nyamayo kuzuma as time goes. They better turn that forex to something which will be profitable. Choices!?
I will be reading the link which Dr. Bayangi Kaunga provided. Internet helps.
Thank you all for your educative and candid comments. Most of the comments are academia and textbook recollections of economics and finance classes in leaning towards against currency devaluation. This is not a bad thing at all.
I must point out that “the commented textbook policies” bestow their full (sometimes partial) intended results in WELL FUNCTIONING and ESTABLISHED ECONOMIES AND FINANCIAL STRUCTURE. And to agree with most of the comments, ‘devaluation’ will be a short term remedy without any long term benefits. This is very common amongst underdeveloped economies.
Unfortunately, the great nation of Malawi will initially find it hard and difficult to realize the full benefits of implemented fiscal and monetary policies (in this case devaluation) because there is still plenty of room to improve the fundamentals of our economy. There are many factors to be considered to improving a nation’s economy.
One of the basics is a must to encourage and reward entrepreneurship. Be novel, creative and industrious with the limited resources. Be efficiently and effectively productive with these resources. And stay globally competitive. Now we can infer in all the applicable academics in business, economics, production, finance, marketing etc., to effectively suffice productivity. Executing this old basic grand Pa. rule of hard work will increase our competitiveness in exports.
In short I quote J’s comment on page 1, “Let’s make people more dependent on home produced things, encourage domestic consumption, export fruit products to those rich countries which cannot grow what grows in tropics and even to some Asian countries.”
This will be an initial step.
You know other countries like South Africa like employing Malawians, the reputation is good in most places we go, but back home, it’s just pulling down each other instead of working hard as someone’s luck can be our luck in the future.
I heard from a friend who happened to be in Mozambique that alimi awo can not even make mizele yabwino ng’ati kumalawi. We should be looking at 50-100yrs and hope those who have made enough money in Diaspora can return home or make remittances caz monies will never be enough.
I believe if ship is to sink, the majority will drown together. Like computers, we are far behind if one can see the maths which countries like India, Japan, South Korea and the like solve and this just leaves more room to be changed, but ulimi, we are blessed with water and soil even though our land is small but I heard that Taiwan is smaller than Malawi and yet they developed from agriculture, selling bannanas to Japan, EU countries and now they moved to high tech.