Devaluation of Kwacha and Malawi’s economy

I have listened with keen interest to the different views advanced on the topical issues regarding the current state of the Malawi economy, and that of the devaluation of our currency in particular.  What has been very fascinating to me is that the issue has been handled with a lot of emotions and I have waited patiently to see contributions from some professional economists and financial experts, who needed todelve deeper and simply into the issue of devaluation to the understanding and benefit of the common man and woman.

An attempt to do this has been made by two articles that were written by two professionals in the name of Mishek Esau and Paul Mphwiyo, albeit their lengths and lack of simplicity.  I however commend them for that.

My expectation was that those articles would spark some intelligent and sober debate from economic and financial gurus, but instead, the issue has apparently been left in the hands of politicians and the general public. Professionals have decided to take a back seat as if the issue at hand does not concern them. Just recently, there was an article by  Sam Mpasu, which excited me in its simplicity but failed miserably to offer a conclusion in its arguments. Not surprising, because as another politician, Mr. Mpasu seemed to dwell on political expediency when this was unnecessary.

Economic plunge worsens cost of living

I am not a seasoned economist but from the arguments I have heard so far, I feel that the issue is not receiving the necessary justice so that the common man in the streets and villages of our country is properlyguided. If we do not explain this issue properly, he or she is bound to be misled.

Let us understand devaluation first.  Devaluation is a deliberate downward adjustment of a country’s official exchange rate relative to the basket of currencies used for foreign purchases and transactions. Devaluation makes the devaluing country’s exports relatively less expensive for foreign buyers using foreign currencies and it makes foreign products relatively more expensive for domestic consumers, discouraging imports in the process. As a result this may reduce the countries trade deficit. If exports of a country become cheaper and more competitive to foreign buyers, then the country can therefore benefit from devaluation, if the demand for its products increases.  It can therefore increase supply in response to high demand without increasing the price of the exported goods.

From the above definition, I ask myself one basic question and that is; what exports does Malawi have on offer now for it to benefit from an immediate devaluation? Another basic question is whether supply for tea, sugar and tobacco will respond to the demand that will be sparked by devaluation? As long as supply of those goods does not increase, the benefits of devaluation will not be attained. When I considerthe fact that the products mentioned above depend on a seasonal cycle for their supply to respond to the foreign demand brought by devaluation, then I can see these effects being obtained in a period of not less than a year.  This can therefore not be called an immediate solution as demanded by some quarters in this country and abroad.

In the Malawi situation, the economy has to rely on costly imports such as fertilizer, pesticides, fuel and so on. If the Kwacha is devalued, the reality is that we cannot reduce the demand for imports in the immediate term.  On the contrary, they will be required in abundance, in order to help boost the supply of the above mentioned agricultural products. Because these inputs will be bought expensively, the cost of production of agricultural commodities will definitely be higher and the end products must be sold at higher prices in order to realize some gains.

It will be difficult to keep the prices of these commoditieslower to make them more attractive to foreign buyers to enable us benefit from devaluation. So we will be caught in this vicious circle. Another problem is that we will be devaluing in the middle of our Budget. As such, the cost of imports such as project materials, fertilizers or medicines, will increase in Malawi Kwacha; In this case more funds will have to be sourced in order to meet the increased cost of the commodities. Where will this extra money come from? I am not getting a sensible answer form anybody.

For us to have positive effects of devaluation, it should be understood that we need to have increased exports and reduced imports.  This will result in a favourable balance of payment situation.  It should therefore be appreciated that when people are talking about devaluation, it is something that hinges on imports and exports.  If the devaluating country’s exports of goods and services increase, it will stimulate domestic employment as well.

To me, the issue of devaluation in this country is being taken as a monetary policy issue other than an issue to do with the structure of our economy.  We cannot talk about devaluation, if we do not talk about exports and imports substitution, in order for us to benefit from devaluation.

There have been understandable arguments that this can be fixed by balance of payment donor support and that this has been a problem because we have antagonized Britain and consequently the World Bank and IMF. However, Malawians need to understand that the solution for our problems should not be placed in other people’s hands but our own.  As I am writing now, it should be understood that Americahas been heavily financing wars in Iraq and Afghanistan, which have drained their coffers.  Do we even know that of late, America has been borrowing from China?  In Europe, countries like Greece, Italy,Spain and other countries are now ‘sick children’ of Europe, who need massive bailouts.  Do we as Malawians realistically think that European countries can divert their attention from these countries toMalawi?

We need to be realistic and not live in Utopia.  To me, donors are looking for every excuse not to fund Malawi because they are broke and Malawi does not offer any serious strategic importance to them.  If you look at issues of human rights in Uganda and Rwanda, you will find that Malawi has a far much better record than them, and yet donors continue to splash money into these two countries.  Civil society in Malawi, which talks with impunity, does not have the same conducive environment in those countries and yet Rwanda and Uganda are the darlings of the West. Why?

I am saying all this, first, because I want us as Malawians to have a reality check.  Second, we need to analyze challenges fully and strategize on how best to move forward on issues that affect us.  We need to plan together as a country on how best we can increase exports that will quickly respond to devaluations.  European countries depend on industries and factories, which respond to the benefits of devaluation quickly because they can rapidly increase production of their goods in response to increased external demands for their products. It is not the same with agricultural commodities.

It pains me to see a conglomerate like Press Corporation, which has potential to earn a lot of Forex, closing several estates and shops in the country, resulting in loss of jobs of tens of thousands and yet the same farms and similar shops are being run by foreigners who are producing better results. Is tobacco the only product that can be produced on Press Agriculture farms? How about paprikajartropha,cotton, soya beans, groundnuts and all these other products that Mulli and company buy and sell outside and are able to generate or even save Forex? How can such a big company that was created to support this country in difficult times like these ones and belongs to the Malawi public by virtue of being under Press Trust be closing down everything?

The other question that I have been asking myself is how long will it take for donors to provide balance of payment support after we have announced a 40% devaluation?  My concern is that if we devalue, at a time like now, when there is no Forex, then the assumption that the parallel market will be eliminated will not hold.  Just like after the recent devaluation of 10%, the parallel market will similarly go up astronomically.  Foreign goods are still being found in shops and their prices have of late gone up as a result.

People are buying Forex from the black market and using it to import goods. It is the common Malawian who is now suffering with the increased prices of essential commodities. Are Malawians who are demanding devaluation doing this in good faith or they would like to see unbearable increases in prices that are bound to cause social unrest? I am very suspicious of the intentions of advocates of devaluation, especially when it comes from people who pretend that they love their country.

Devaluation demanded by donors can only work if the Forex is made available at the time the devaluation is being announced.  Otherwise, the alternative would be to borrow the Forex from venture capitalists,which is not cheap.  This would offer a short term solution but the country will have to suffer the consequences of repaying in foreign currency at a high interest rate.

I am not seeing devaluation as an immediate solution and I am making the following recommendations to improve the Forex situation in the short term:-

1)      Government should immediately suspend importation of goods that can be produced in Malawi such as milk products, eggs, chicken, meat etc., and all other things that are not necessities for the country. The figures may look small but when aggregated, we are talking of big figures. This can be reviewed when the situation improves. Malawi Revenue Authority can be used to monitor this ban.

2)      Importation of second hand vehicles should be suspended for a period of six months despite what the source of Forex is. I am aware that this business is a source of living to some Malawians but we should realize that sacrifices are necessary for the wider good. The Greeks are sacrificing and even cutting salaries by 20% (which the opposition and NGOs in Malawi cannot accept!)

3)      I am appealing for re-opening of Forex Bureaus. The licenses should however be given to indigenous and patriotic Malawians, not foreigners who masquerade as Malawians.

These are tough and unpalatable decisions in some quarters and they bear short term political risks but they are necessary. Medication is usually not sweet and we must all appreciate that some sacrifices need to be made.

When the Forex situation improves, then let’s start looking at the issue of devaluation. The issue here is about timing.

I would like to appeal to our learned men and women to comment on these issues soberly. I would like MBC television and radios to engage people who are gurus in these subjects to present their pro and counter arguments on TV and in radios so that the larger audience can benefit.  Let us try to remove all emotions and engage each other intellectually for the benefit of our beloved country rather than misleading the public that devaluation is some magic wand that will solve all our problems.

God bless Malawi!!!

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