Dilemmas of devaluation

While installing and elevating Chief Makwangwala to the rank of senior, President Bingu wa Mutharika spoke his mind on devaluing the kwacha. Several months ago, he had reluctantly devalued our national currency by 10 percent and apparently had not done enough as far as the donors wanted.

In Ntcheu, he made it clear he was not in the mood to do more than what he had done. There are some Malawians who want him to comply with the IMF’s and donors’ demands without further hesitation.

Have these people taken into account the entire dilemma involved in devaluing a currency? Usually, those who press for the devaluation make reference to one perceived advantage and ignore other consequences.

If the Malawi kwacha is devalued, our customers abroad will obtain our exports at reduced costs. We shall not necessarily charge lower prices than we are charging currently, but the kwacha will cost overseas customers less than it is now. It is in this way that they will find our supplies cheaper.

The advocates of devaluation do not use the brunt language of cheapness. They say Malawi’s exports will be more competitive. They will no longer be shunned by buyers on account of prices.

But will our supplies really sell much more than they are doing now? It depends on what our competitors do. Those who are like us export tobacco, sugar, tea, coffee and uranium. If they also devalue their currencies, the benefits that devaluing the kwacha will bring might not amount to a good deal.

When we have devalued the kwacha it will be more expensive for us to obtain dollars, euros or pounds. The goods that we have been importing will now cost us more.

Whether we shall now be forced to incur more reserves our imports will depend on several factors. Are there local substitutes for the foreign goods we import which will now cost more? If there are substitutes, devaluation will be a boon to our local manufacturers or producers. Buyers will now be buying more of the local products in preference to the more expensive foreign ones. As a result, employment will rise and this will be very good for the economy.

However, some of the goods we import have no local substitutes such as cameras, cars, computers, chemical fertilisers, so we might be compelled to keep on importing the goods we have been importing at higher prices.

There is something called terms of trade—a comparison of the price we pay for our imports and the prices overseas buyers pay for our exports.

In the economics of development, it is usually pointed out that for most of the period after World War II, the terms of trade have been in favour of developed countries and unfavourable to developing countries.

Developed countries have been selling their manufactures to developing countries at even increasing prices while developing countries have been selling their commodities at declining prices.

When the kwacha is devalued, the terms of trade will definitely go against us. We will be selling at lower prices, while buying at higher prices.

It is attributed to a president of the European Union (EU) countries the remark that presidents know that a certain solution is the answer, but they do not know how to be elected again if that solution is implemented or words to that effect.

In case of Malawi, this much we can foresee: if the kwacha is devalued again, prices will shoot up higher still.

This will not endear the DPP government and the masses and it might cost the DPP and its presidential candidate heavy losses during the 2014 elections. Common voters do not like inflationary prices.

When the structural adjustment programme was imposed on the UDF government, it entailed laying off many civil servants. The pain was softened by some sort of grant from the Bretton Woods institutions or the donors which was used to compensate the job losers.

If the donors compel our President to devalue the kwacha and prices shoot up astronomically, subsidies of goods consumed by the poor would be necessary to avoid riots.

Where do we get the subsidy money? Would our good friends be magnanimous enough to assist us with subsidies? Otherwise, we are in cul-de-sac.