On the political-economy of devaluation of Malawi Kwacha

Amidst the economic hardships that Malawi experienced, and continues to experience, there have been a number of suggestions virtually from every angle of the society as to how we can find ourselves out of this quagmire. Some of these suggestions seem weird, others just incomprehensible. One of the suggestions which most analysts put forward has been the devaluation of the Kwacha.

And here we are, that after the devaluation of the Kwacha, things seem falling apart. What is wrong with devaluation that all over sudden we are attributing every problem to the devaluation of the Kwacha?

Since the last quarter of 2010 or thereabouts President Bingu wa Mutharika had been refusing to tow the International Monetary Fund’s (IMF) recommendation to devalue the kwacha so as to bring back the Extended Credit Facility Programme which would eventually bring back other donors who had been withholding their financial support to the country. It is the tradition of the major European co-operating partners, the European Union and the Common Approach to Budgetary Support (Cabs) to take the cue from the Bretton Woods Institutions in deciding to offer support to the developing world.

Malawi Kwacha

The IMF was initially formed to stabilize the international capital markets so as to revitalize international trade and investment. As such it has been the responsibility of the IMF to monitor and stabilize the international financial systems through the short-term financing of balance of payments deficits. However the role of IMF in the developing world has been changing over the years due to a number of financial shocks that include a world recession, increasing fuel prices and the lowering of exports which are mainly primary goods. This financing from the IMF is basically contingent on a number of requirements depending on the purpose of the loan being sought by the recipient country.

It is argued that these conditionalities, as they have come to be known, are meant to increase the effectiveness of IMF resources in meeting the objectives of the loan. As the Malawian experience would show, these conditionalities are generally draconian and sanction a lot of untold hardships on the poor masses who do not even narrowly understand as to why their leader (s), whom they had chosen by their own volition, should be taking orders from an unelected officials somewhere in New York and London.

This experience is not only unique to Malawi but also all countries that benefit from the IMF where these conditionalities have also proved controversial as the IMF has been directly involved in the development process through its surveillance mechanism of the macroeconomic policies. As the IMF-led policies were being implemented willy-nilly, everywhere inflation increased dramatically, real output fell nose-divingly, businesses closed and unemployment figures jumped geometrically. Somewhere people took to the streets protesting the rolling out of the same. As a result disorder, mayhem and rioting ensued. Is there something wrong with these policies? Are the IMF policies inconsistent with the development objectives and the peculiar social conditions of the developing world? Are the policies out of touch with the realities on the ground? And then, how valuable has been devaluation (another IMF conditionality!) at this point in Malawi?

Devaluation is generally understood as a deliberate government policy decision to reduce the value of its currency in terms of other currencies. Usually a government devalues its currency if its economy is experiencing a current account deficit. A deficit basically occurs when one’s value of debits exceeds the value of autonomous credits. Now a country’s deficit cannot be sustained indefinitely because eventually a country’s reserves would reach low levels. At this point a country cannot be able to negotiate for loans from development partners because these reserves are used as a yardstick if a country can be able to service its debts. Usually countries are then forced to adopt domestic policies and strategies to try and correct the situation. If this fails a country would then consider devaluing its currency. Malawi found itself in this scenario by April 2012 when the new regime came into office.

Under NORMAL circumstances this makes exports cheaper in terms of foreign currencies, but imports become expensive in terms of domestic currency. It is assumed that this would eventually eliminate the current account deficits. So if one was importing a kilogram of flour at three hundred kwacha, upon devaluation the same would cost more being contingent on the percentage of the devaluation. This is so because in theory the aim is to limit imports so that the monies accumulating from the cheaper exports can be channeled into the national reserves.

The above scenario makes very simplistic assumptions when applied to developing economies like Malawi. In the first place there is a mistaken assumption that there are goods readily available for exports which would translate to bringing in lots of the much needed foreign currency. As it stands the only prime product that Malawi exports is Uranium from Karonga being mined by Paladin. This product has a readily available market and its prices are far from being fixed by the economic conditions prevailing in Malawi.

Other than this we have tobacco, tea, cotton, sugar and coffee which are all agricultural products. These products are sold to traditional buyers who have quota volumes which are nevertheless bought regardless of whether there is devaluation of the Kwacha or not. And as Malawi remains a predominantly importing and consuming country, it would be a mistake of the highest order to temporarily suspend imports by default as a consequence of the devaluation. This would literary entail some companies downsizing and at the same time smoking out small-scale cross-border traders. Above all the argument here is that there is no guarantee that devaluation would automatically lead to a net increase in exports that would lead to an increase in the national income.

If Malawi were an Economy of Scale like the People’s Republic of China (Mainland China) or South Africa where there is massive mass production of diverse products, one would appreciate the  need for a devaluation as the exports would dramatically  improve within the shortest period. In this way the short-term pinch off-set by the devaluation would not really be felt by the poor as prices go up. But in Malawi I strongly feel the IMF should take the burden of providing extra funds that would eventually subsidize the negative externalities being churned out by the unintended effects of the devaluation in the short-term. Otherwise social mayhem would surely erupt instantly as the prices of goods and services skyrocket without any cushioning mechanisms.

Secondly it is wrong to believe that there are readily available buyers who will automatically buy from Malawi just because Malawi has devalued her Kwacha! The buyers of Malawian products have nothing to do with our economic plight and as rational actors will not buy the goods on passionate grounds but considering their value. The IMF does not enter into negotiations with international buyers to compel them to buy from Malawi just because Malawi has devalued her currency. So what guarantees are there that exports would increase? Are there any statistics to prove that each time that Malawi has devalued the Kwacha the export volumes have proportionally increased? I guess this data would prove very vital for the IMF and different analysts in deciding these issues. My gut feeling is that it does not having looked at some random figures around.

A theory is not important by itself but in the way it translates into uplifting the lives of the people. I believe no theory was mooted just for academic discourse but meant to directly improve the welfare of the people. Otherwise while we are stuck in our textbook economic theorization which champion devaluation as a panacea to our economic problems, the people are always left suffering miserably on the ground.

A well-meaning government must surely take its time before adopting such measures even if it means plucking some feathers within the international bureaucracy. Our current scenario shows that we need to put in place cushioning mechanisms before devaluing the currency in order to protect the lives of the people who will inevitably be negatively affected by any means.

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