How devaluation would affect your finances

The previous couple of months have had followers of my column asking me to explain what devaluation is all about and how it would affect their personal finances.

For a while, I have been dodging this subject because I have been considering it as somehow technical for most Malawians. But when my own child came home last week laughing and said ‘dad, my teacher wanted to buy my money with another money. Can you believe it?’

Apparently, he had accidentally carried a one dollar note in his bag and his teacher jokingly asked if he could give him Malawi Kwachas for it. When my son was telling me this, there were some cousins who sided with the boy “Aaah! Ndalama nazo zikugulana mwawanthu? (Can one buy money?)”

But yes, money is sold and bought like any other commodity and there are businesses that just specialise in this trade. United Kingdom thrives on this and stopped concentrating on merchandise exports long time ago.

After sweating to give my son a plausible response, I also had no choice but to give a go at the devaluation issue this week. I will highlight three main expected effects of devaluation.

First, what is devaluation?

Simply put, it is the loss of a currency’s value against other currencies. To put it more contextually, if Oweherya is in the business of buying cars from Japan and selling them in Malawi, he will need Japanese money (or a currency that is universally accepted like the United States dollars).

So he will have to first change his Malawi Kwacha money into United States dollars. In other ways, he has to buy United States dollars first because Japan will not accept Malawi Kwachas.

Now for Malawi, you presently need K150 to buy one dollar ($1). If the car Oweherya wishes to buy in Japan is priced at $2 000, then he will need an equivalent of K300 000 (K150 multiplied by $2 000) for the bank to give him the $2 000.

However, if suddenly government decides tomorrow that one should have K200 to buy one dollar, then you will now need K400 000 (K200 multiply by $2000) to buy your car in Japan. So for the bank to give him the same $2 000 this time, he will need K400 000.

The first effect of devaluation, therefore, is causing imports to be expensive.

—Let’s continue this interesting discussion next week.