Devaluation, Malawi economy

There has been an orchestrated campaign in the media that government is somehow responsible for the current economic meltdown that has been characterised by high inflation and widespread strikes, especially in the public sector.

Government is being blamed for unleashing all these problems because it devalued the kwacha in May this year.

Unfortunately, the authorities have not done much to put their case to the people. This, in my view, is symptomatic of a lack of leadership and /or a failure by authorities, that are making the economic decisions in this country to grasp the issues.

It appears that politicians who are running the country are too busy congratulating themselves for getting into government and allocating seats on the gravy train to think through the issues and convey the right message to the people.

The little I heard from our leaders is that there is a lot of money coming which they intend to use to cushion the impact of the devaluation through programmes such as public works and cash transfers.

Needless to say, this is misleading and raises false expectations which may even lead to more strikes and unrest further down the road.

‘There are no resources’

Government simply does not have resources to cushion people against the impact of devaluation.

There is also no donor that will provide resources for such a massive and ultimately futile undertaking.

The government critics should realise that on May 7 2012 the authorities did not just announce the devaluation of the kwacha.

They also announced something more important than the devaluation itself.

They said that the kwacha has been floated, meaning that its exchange rate against other foreign currencies will now be determined by forces of supply and demand.

As the late president Bingu wa Mutharika observed during his public lecture on July 20 2011, no one can tell what the true value of the kwacha should be. Only a free market of willing buyers and sellers of the currency can determine the true value of the kwacha at any point in time based on the prevailing demand and supply conditions at that particular time.

If the devaluation of the kwacha from K168 to K250 to the US dollar had been wrong, then the fact that the kwacha is now floated would have meant that, through the market, its value would have gone back to the K168 to the dollar value at which it had been fixed prior to that date.

But this has not been the case as the kwacha has continued to slide against the dollar even during the tobacco selling season, to the extent that as of end of August, 2012, its value was around K290 to the US dollar.

If one is to accuse the monetary authorities of anything, then it should be that the kwacha should have been devalued by a bigger margin.

The issue at hand should, therefore, be why does our currency continue to slide against other currencies thereby eroding the people’s power to buy imported commodities such as fuel and other items.

Rule of demand and supply

Going by the rules of demand and supply by which the exchange rate is now being determined, the answer is quite obvious.

As a country, we are not producing enough tradable goods and services that we can export although we have a large appetite for imported goods and services.

This is the problem we have and in all honesty, we cannot blame this problem on a government that has been in power for less than six months.

By fixing the exchange rate at an artificially high value of the kwacha, the previous regime actually were hiding from the painful fact that our economy is weak and does not produce enough goods and services that we can sell to outsiders for us to earn the much needed foreign currency.

It was like a ‘sugar daddy’ saying do not worry about working, I will provide for your needs. Unfortunately, the ‘sugar daddy’ did not have enough resources to sustain this undertaking and when he borrowed and the lenders quickly realised that he could not repay, the credit lines were closed and it became increasingly difficult to raise foreign currency for importation of basic commodities such as fuel, medicines and others.

The results were fuel queues, lack of medicines in hospitals, companies that could not import raw materials and this led to closure of their operations, increasing empty shelves in shops, etc.

One shudders to think of where we would have been if we continued on that path for another six months.

Our problem as a country is, therefore, to find ways of producing goods and services that we can export to earn foreign currency, create demand for our kwacha abroad, thereby increasing its value.

The brave decision by our authorities to allow the kwacha to float and reflect its true value helps in that imports become more expensive while exporting is more valuable.

This is an incentive for economic players to produce more for sale outside the country while importing less.

Ultimately, this will make our economy more productive.