Construction amid devaluation

Devaluation is a policy-related activity that lessens the value of a local  currency compared to foreign ones, particularly major trading partners.

The major trading partners for Malawi’s construction industry are South Africa, Europe, China and, of late, Tanzania, Zambia and Mozambique. Because Malawi has taken too long to devalue the kwacha, one expects  prices of goods and services to rise quicker and with higher percentages than imagined because the country imports most of its goods.

According to one research [Tchereni, 2006],  65 percent of her building materials are imported.

Now, because the importers are importing at a higher price, they need more kwacha, hence their need to hike prices.

It is also important to note that when the dollar was in short supply in banks, the traders got them on parallel markets  at a price even higher than the new official rate. At that time, most traders (if not all) had already increased the price level of their products in reaction to the market forces.

Now that the dollar is likely to be available in banks at a better rate, will they increase the price level? What should a QS do?

The level of prices submitted for a particular project may reflect the market situation at that point in time.

The quantity surveyor has the responsibility of providing accurate and timely cost advice throughout the duration of a project to a variety of organisations, including the client and the architect. In situations such as these, a quantity surveyor may consider a couple of points.

First, the existing projects. It is prudent to work out an estimate of the likely quantities of the remaining materials and their likely cost.

A cost report can do. Visit the site to take into account the quantity and quality of unfixed materials. If possible, the estimated prices should not be based on the percentage of devaluation, but rather, the actual prices from reputable suppliers. If the contract is fixed, convince the client that the situation is beyond the contractor’s control and that it was unforeseeable due to the political environment Malawi was in.

It is also very important for the whole project supervision team to be careful because some contractors might take advantage of the situation to compromise on the quality in order to cushion themselves on the high prices on the market.

Secondly, consider proposed or new projects. The best solution to an already tendered ‘fixed contract’ project that is waiting for evaluation or award letter is to re-tender.

This might be costly but it will enable realistic competitive pricing and minimise future disputes. Extend the tendering period for tenders that have not been submitted. If the contract is not fixed, consider using a formulae method for adjusting contract price. The adjustment factor in the formulae should be based on increases on major building material since indices are not accurate for the construction industry in Malawi. 

As a result of this devaluation and the new policy of letting the foreign exchange market to determine the exchange rate on its own, the construction industry should expect hard hitting and very unstable prices of goods and services in the short period of say six to 10 months.

Meanwhile the kwacha is going to be responding to the forces of imports and exports as the Reserve Bank has told us. This should be noted with seriousness as we are approaching a boom in the construction in the coming months.

So, what should the policy makers do?

Firstly, Malawians should be encouraged to start producing for the domestic market. On the other hand, government must begin encouraging investors involved in manufacturing for the local market. Previously, this has not really worked because most products needed imported ingredients.

And when such ingredients were taxed and embedded in the production cost, most locally produced products proved expensive than the finished imported products of the same kind.

In this case, government can make deliberate policies such as introduction of tax holidays so as to encourage local businesses to produce the needed materials. Imported items similar to those produced locally can be banned or heavily taxed to make the local ones competitive. South Africa has done it to boost their local industries, including banning of imported cars.

The alternative is to poach the commonly attractive material producers to invest locally.

This requires government to show interest. 

Secondly, after satisfying the local market, then we can begin to export to lesser sophisticated nations before heading larger markets such as Europe and US.-The author is a lecturer in construction economics in the Faculty of Built Environment at Polytechnic.