Fiscal, trade, industry policy framework and structural issues are key elements resulting in currency devaluation in Malawi—DCG Chief Economist Chifipa Mhango
The Malawi economy is suffering from mismanagement of the fiscal framework and lack of a cohesive approach towards trade and industry policy implementation, as well as not dealing with the structure challenges in the economy, while applying short term solutions and wrong prescription.
This has been said by Chifipa ‘Chifi’ Mhango, Chief Economist for South Africa’s Don Consultancy Group in reaction to the recent devaluation of the Malawi Kwacha by the Reserve Bank of Malawi (RBM).
Mhango said: “The Malawi Government should rather be creating a conducive environment to expand the size of the Malawi economy, which is not growing enough in terms of its Gross Domestic Product, with a share of only 0.01% of the global economy.”
He emphasized that “it is concerning that Malawi’s ability and capacity to produce per person is diminishing relative to other nations, putting the country in a most vulnerable situation economically”.
“The devaluation of the Malawi Kwacha is a short-term solution and at times a wrong prescription to the deeper challenges the Malawi economy is facing. The devaluation may satisfy the interest and position of the lending partners broadly but could damage the country’s social well-being and the economy further if not managed well considering that Malawi trade position is skewed towards importing and with relatively uncompetitive landscape to attract investment.”
The revered Malawian economist in his host nation, raised concerns around the inflationary outlook for the country, “especially with the price increase reaction that are being announced across the various segments or products within the Malawi economy”.
On the price increases following the devaluation, the Ministry of Trade & Industry has since warned manufacturers, traders and suppliers, who have taken advantage of the situation by unreasonably raising prices of their goods and services and added that together with the Competition and Fair Trading Commission (CFTC), they will intensify market surveillances across the country to establish and gather evidence of possible violation of the Competition and Fair Trading Act (CFTA).
Secretary for Trade & Industry, Christina Zakeyu also took note that “some traders have even temporarily closed their businesses in order to adjust prices for old stocks that were already in shelves and warehouses before devaluation”.
She thus warned the traders and general public that “hoarding of goods and services in order to take advantage of price increases is tantamount to unconscionable conduct against consumers”.
Meanwhile, Mhango further says Malawi inflation rate, which is currently at 27.8% “is already among the top 10 highest in Africa, and the country could be heading towards the record high inflation rate since its existence”.
“Under such an environment, the position of the Reserve Bank of Malawi, under its current monetary policy standing, would be to hike lending rates to unbearable levels from the current already high of 24%.
“This will further discourage business lending activities to support the much-needed economic expansion. Yes, devaluation may be the right approach to stabilise the foreign exchange market, but it may damage the economy if done aggressively and while not examining the underlying causes that has put the country to this situation.”
Mhango further warned that the situation around the current devaluation “carries a political posturing considering the impact it has for the already depressed and vulnerable society who are experiencing the high costs of living on a daily basis for key basic commodities, high unemployment rates, high inequality in the society thus being a bleeding ground for crime, and above all alleged high corruption levels as defined by the global corruption index”.
In his glance of the Malawi economy, the DCG Chief Economist has continued to advise the Malawi Government “to pay strong attention to the country’s trade position, the fiscal expenditure, the debt levels and how government loans are utilised; and alleged corruption within government — especially where the payments are externalized in foreign currency”.
“On the worrying expenditure patterns in Malawi Government, where for instance in the period 2015 to 2022, according to data sourced through the Reserve Bank of Malawi, the total expenditure was MK11.8 trillion with total revenue collected at MK9.1 trillion, thus a deficit of MK2.7 trillion.
“What is staggering is that from the total expenditure of MK11.8 trillion during this entire period, only 17.8% was spent towards development of the country,” he analysed.
While on Government expenditure, Mhango outlined a worrying feature of expenditure pattern in the period 2015 to 2022, to which data sourced through RBM shows almost MK9.7 trillion of the MK11.8 trillion of the total expenditure, which is 82% and is on recurrent expenditure.
“This means, 82.2% of Government expenditure has been used for regular payments and expenses required to run a country. It includes all fees, exclusive of capital forms of payment, and does not result in acquiring fixed assets.
“A list of examples of recurrent expenditure include salaries, wages, employee allowances, operational costs like water bills, electricity, accommodation, traveling, telephone, cost of maintaining equipment, and installation, funds used in covering costs of compulsory obligations, debts, price of remunerations, subsidies transfer among other services inclusive of payments on goods and services.”
Mhango added that any government or business operating under such an environment “can never be successful, and to add salt to the wound, in 2022 alone, Malawi Government reached a record high in its total expenditure to MK2.7 trillion, with recurrent expenditure record of MK2.3 trillion, to which development expenditure was only 14% at MK394 billion” — as reflected in data sourced through RBM.
“Unfortunately for Malawi, the trend towards excessive spending, to which the large share is on recurrent expenditure, and less expenditure towards development as well as a narrow revenue, continued in the period in the period January to August 2023.
“Government expenditure was at almost MK2.1 trillion, recurrent expenditure at almost MK1.7 trillion — that’s 82.8% of total expenditure, with only MK352.2 billion in total towards development expenditure; thus only 17.2%, and Government deficit of MK392.7 billion.
Mhango continued that the Finance Minister’s “hands are tied to come up with real measures that would cushion the effect of the devaluation due to the fiscal challenges the country is under, for even reducing sales tax on some basic products would mean less government revenue thus widen the deficit under the current expenditure pattern”.
“Malawi problems are not on devaluation of the currency, but rather on what is causing the environment to reach to that as the only solution, which is short term and disruptive to the economy’s monetary policy environment.
“Malawi’s major challenges are on the fiscal side, and its trade and industrialisation path, to which managing the government expenditure through restructuring (limit growing wage bill, travel expenses for local and foreign trips etc), growing the economy, expanding the export market, diversification of export product based and encouraging industry activity to which import-substitution becomes the key economic growth path, are weak in approach and implementation.
“Lack of connectivity through key infrastructure such as roads, railway, water transport facilities and energy production capacity has been an impediment to attracting investment into the economy.
Malawi needs to address these areas as a long-term solution to its challenges. A well-managed fiscal framework, trade and industry policy framework provides for a better monetary policy environment.
“A massive 44% devaluation of the Kwacha is a harsh reality of a mismanaged economy which we have continued to warn the Malawi Government in our various articles,” concluded Mhango, who is Chief Economist & Director of Economic Research and Strategy at Don Consultancy Group, South Africa.
While the Ministry warned of hiking of prices, the Government itself, through Malawi Energy Regulatory Authority (MERA), has increased pump prices of fuel with effect from today with petrol up by 44.90% from K1,746 a litre to K2,530; diesel at 42.40% from K1,920 to K2,734 while kerosene is up by 51.47% from K1,261 to K1,910.
Jet A-1 airfield prices has also gone up and for Kamuzu International Airport it is up by 32.67% from K1,401.06 to K1,858.83 and for Chileka at 32.16% from K1,351.67 to K1,786.39.
The MERA announcement added that the adjustment was done after considering trends in the world petroleum products prices as well as the exchange rate movements and their impact on energy prices.
MERA has also adjusted upwards electricity tariffs from K123.26/kWh to K173.70/kWh, which will further trigger price increases for goods and services.
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