Devaluation of Malawi Kwacha: a necessary evil

Devaluation is a Jargon that has become as popular as once was the “Mose wa lero” song, which nearly substituted the National Anthem. It is with the same enthusiasm, with which we sang the song that we debate over devaluation. What captivates my interest about my country is that whatever we decide to do, whether we comprehend its implications or not, we do it enthusiastically.

However, I feel devaluation, just like any other theme pertinent to politics and economics, demand strong combination of enthusiasm and exhaustive knowledge to facilitate significant advocacy and debates.

Devaluation is a theoretically a simple theme, but rather challenging in practice, because like most economic endeavors, it’s execution is backed by assumptions which are highly debatable with regard to the context or economic environment in question.

In our context, devaluation simply means that our Malawi Kwacha, the domestic currency, must officially become cheaper relative to foreign currencies like the US dollar and South African Rand.

K500, Malawi's largest legal tender

Parveen Zaiby, wrote that, “Devaluation is usually undertaken as a means of correcting a deficit in the balance of payments. The Balance of Payment (BoP) is an accounting record of all monitory transactions between a country and the rest of world (Wikipedia). It is in this balance of payment account where every import and export for a given period, usually one year are recorded. At the end of the year, the account is expected to balance with a zero deficit. But in our case it means that, the balance of payment account has a negative balance, depicting more imports than exports.”

It is a normal trend, that our country registers negative balances in the balance of payment. Usually, when such a deficit occurs the Reserve Bank of Malawi, which is our central bank uses it forex reserves to suffice for the balance. Unfortunately, the Reserve Bank does not have such reserves. In such case, devaluation is a necessarily evil that seeks to counter the deficit. It is imperative to understand here that devaluation is neither the problem nor does it create the problem in the first place, rather it is a remedial endeavor to clear an already existent economic mess.

The underlying view of devaluation is that when a currency is devalued exports are boosted up, consequently forex is generated. This is set in motion by the law of supply and demand.

For example, if Malawi Kwacha is devalued and becomes cheap, it will be very expensive to import cars, clothes, cooking oil and toothpicks (we actually import these). Consequently, this will decrease the demand for imported commodities, which will decrease the forex outflow. While our demand for imports is decreased, the demand for exports of our domestically manufactured or rather domestically extracted raw materials will increase. Foreign markets will find our prices low and attractive. While they buy more of our exports, we will increase forex inflow.

But what are these exports that will rise and generate us forex? Tobacco? Kayerekera Uranium? or potatoes? This is where our economy is challenged.

I feel the shortage of forex is not necessarily because of depleted forex reserves due to too much imports. There are many other direct causal factors, but the fundamental one is that we generated inadequate forex to meet our import demands in the first place. It is our incapacity to generate forex through exports of locally manufactured; value added commodities and products, that has propelled the predicament. To think that we will manage to produce exports and fill up our forex reserves because of devaluation, I stand to be corrected, is a little absurd.

The devaluation however, has remarkable merits. For instance, devaluation will secure the forex held by speculators. Speculators are those shrewd business individuals that foresaw the impending devaluation, and bought at a cheap price much of the forex in order to sell it at a higher price when the devaluation materializes. When we say Malawi has no forex, it might not necessarily mean that there is no forex in our country, it only means the Reserve Bank and commercial banks are the ones deficient of forex, but speculators may have forex hidden under their mattresses or above the ceiling in their homes. This is the forex that is traded on the parallel markets; behind buildings, in street corners, under trees and under bridges.

If our Kwacha is devalued with a reasonable percentage, to the extent where it can compete with the prices on the parallel markets, the forex held by speculators might be channeled back to the legal system. However, we cannot tell if the speculators are holding significant amount of forex, enough to stimulate economic activities. We can only assume, because that is what happens in economics.

On the other hand, devaluation has an apparent propensity to triggering inflation, which is a general increase in the prices. Sam Vaknin, Ph.D, wrote that, “… so devaluations have a tendency to create a cancerous chain reaction: devaluation-inflation followed by more devaluation and yet by more inflation.” Dr Sam seems to suggest that resultant inflations of devaluations are a lot more uncontainable, all other factors constant. When the Malawi Kwacha was devalued by 10% last year, there was inflation, but that simply necessitated another devaluation of 40%, which will result into an even worse inflation. After the 40% devaluation, we cannot completely rule out the possibility of another devaluation and a consequent inflation, like I said, devaluation is based on assumptions.

Finally, while devaluation of the Kwacha will definitely trigger grievous side effects of inflation, it still has some curative potential, especially when precautionary measures are taken to contain the inflation. Most economists agree that economies respond to natural fluctuations that are inevitable. However, how our country decides to scale up when down in the cycle, requires integrated efforts and the spirit of goodwill of all stakeholders, like the government, opposition parties, civil society organizations and the international community.

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Author is a Malawian and young graduate. He holds a Bachelor of Business Administration degree

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