When Peter Mutharika’s Democratic Progressive Party (DPP) took over power in May this year, some of the biggest economic questions among monetary policy experts, market analysts, independent observers and jittery business leaders included the following: What will be the new government’s strategic direction on the issue of pricing?
Will the exchange rate return to its fixed ways? Will the automatic fuel pricing mechanism be rolled back? What about utility prices? The uncertainty caused running stomachs among some players.
But Finance and Economic Planning Minister Goodall Gondwe could not have been clearer when he addressed that question head on in his 2014/15 budget statement, especially on the matter of the exchange rate regime.
“Mr. Speaker, Sir, as the House is aware, government in 2012 liberalised the foreign exchange regime in order to support the build-up of foreign exchange reserves. The deregulation of the foreign exchange market and implementation of market determined exchange rate regime eliminated misalignments and distortions in the foreign exchange market. This policy stance is what has always been emphasized in all countries with an International Monetary Fund [IMF] programme.”
I know it makes political sense for Gondwe to bring in the IMF as a fall guy in perpetuating a policy that initially brought a lot of pain among Malawians, especially because of the inflationary pressures that came with it and which the country is still grappling with today, but which later proved to be very good policy.
With or without the IMF, fixed exchange rate regimes are fading away globally in favour of flexible currency price determination which, if truth be told—especially in Malawi—has been more of a managed float than a free-floating system whenever we have allowed the markets to function as they should.
There is no doubt that the managed floatation that Joyce Banda’s People’s Party (PP) regime embarked on has been instrumental in helping to underwrite imbalances in the foreign exchange market, especially when it sharply narrowed the gap between exchange rates in the black market and those offered by authorised dealer banks (ADBs).
The marked decrease in import payment backlogs and fuel availability testify to the wisdom of responsibly letting markets determine prices, of course with the Reserve Bank of Malawi (RBM) maintaining a watchful eye on rogue traders and remaining vigilant to the pitfalls of over deregulation.
Apart from the exchange rate, Gondwe has also left utility prices to be cost reflective, embracing the liberalisation crusade that the Banda administration was brave enough to champion and which most previous regimes saw as not worth burning their political capital on.
On fiscal policy, Gondwe has also prudently left taxes almost unchanged, hoping that this would help spur economic growth as consumer spending and reinvestments create more wealth, whose fruits may then be taxed in abundance to help lower the deficit.
If the estimated expansion in growth domestic product (GDP) of 6.1 percent is achieved and the inflation rate averages around 15 percent as projected over the new financial year, almost half of the 27.3 percent for 2013, government should meet its revenue targets without unduly penalising anyone.
That said there is no doubt that Gondwe has struggled to add up the numbers, which I am not even convinced add up.
I just think that the budget deficit has been understated and will be a lot larger at mid-year than declared.
The threat of heavy domestic borrowing and its resultant inflationary and crowding out effects also appear to have been suppressed, especially given how skewed this national budget is. But considering how precarious our fiscal position is, what can we expect?
As I conclude, I must say I enjoyed how Gondwe channeled the nationalistic spirit of our founding leaders to rally the country towards selfless contribution to the development of the country. I particularly liked the following passages:
“Mr. Speaker, Sir, and honourable members, almost exactly half a century ago, our founding Parliament sat in Zomba as we are here in Lilongwe, pondering on a strategy for boosting the economic development of an independent Malawi and how to achieve a path of accelerated economic growth that would propel the economic welfare of its citizenry. From reading Hansards of the time, it is inescapable to see that here were leaders oblivious of their own comforts, but singularly devoted to their country.”
“Honourable members, we do not need to be reminded that as a first group of political leaders of the next 50 years, we are also charged with the same responsibility as were our founding fathers; to mobilise and lead the country in its fight against poverty, disease and hunger that continue to afflict our people. Like our predecessors, we are expected to chart a path for a further transformation of Malawi. Our people demand that we put the enhancement of their welfare before our own. This then, honourable members, is the challenge before us. We must lead the country even better than they did. Our aim must be to erase this constant and irritating cliché which repeatedly says that ‘Malawi is one of five poorest countries in the world’. As the first Parliament of the coming half century, let us begin to address this challenge with the passion of patriotism.”
Well said Honourable Gondwe. This country needs such pep talk once in a while.
- This article appeared on Cut the Chaff column in Weekend Nation newspaper