In a space of 19 months between May 2022 and November 2023, Malawians experienced two devaluations of the kwacha, so-called currency realignment purportedly meant to stabilise an economy on the deathbed.
The mantra at the time was that the 25 percent devaluation implemented in May 2022 and the 44 percent in November 2023 were necessary evils as the ailing economy needed to endure swallowing bitter pills to get healed, as it were.
When some of us argued that devaluation as a prescription may have been a misdiagnosis given the realities in our economy, the suggestions were dismissed with disdain.
In my June 21 2022 entry of Business Unpacked headlined ‘Why devaluation may have been a misdiagnosis’ I submitted that while devaluation, a deliberate downward adjustment in the value of a country’s currency compared to foreign units, is a common monetary policy tool used by countries with either fixed or semi-fixed exchange rate, it may not be the magic wand Malawi needed.
Devaluation has always been a sticky issue in Malawi and I recall that between 2010 and 2012 former president Bingu wa Mutharika stood his ground against International Monetary Fund (IMF) recommendations to devalue the kwacha. His argument was premised on the fact that the move would hurt local consumers and only benefit importers more as Malawi was a predominantly importing and consuming economy with negligible exports.
In May 2012, the administration of Bingu’s successor, Joyce Banda, bowed down to the pressure and devalued the kwacha by 49 percent.
Coincidentally, both devaluation decisions of 2012 and 2022 were done at the height of foreign exchange shortages, donor aid freeze and rising prices of goods and services.
In the aftermath of Article IV Consultations with IMF, RBM Governor McDonald Mafuta-Mwale, PhD, made a bold statement that this time around, “the patient”, Malawi, has decided to ignore what “the doctor”, IMF, has prescribed.
He is quoted as having stated: “We have made it clear to the IMF that we have had a lot of devaluations without achieving the intended result and we cannot repeat that because it only hurts our people with inflation.
“Our emphasis is now on the enhancement of foreign exchange supply through local production and exportation, incentivising both local and foreign investors, and seeking other donors to assist Malawi as we develop our own capacity to generate export proceeds.”
Not sure whether to call this too little too late. But then it is better late than never, what is important is that those at the helm now see the need to face the realities and devise alternatives.
That said, what happens to Malawians left bleeding by the impact of the two devaluations in the name of enduring swallowing bitter pills to get healed? Due to the devaluations, consumer prices have skyrocketed and inflation rate is hovering around 30 percent. The situation would have been worse if fuel pump prices were not politically suppressed, but this is another ticking time bomb waiting to explode with even worse implications.
Theoretically, when a currency is devalued, exports from the particular economy are expected to be competitive on the international market and generate more foreign exchange inflows. Imports, on the other hand, are supposed to be expensive. It works better for countries with tangible export products.
In a paper titled ‘Is devaluation an option for Malawi’s current debt challenge’ published before the May 27 2022 kwacha devaluation, economists Thomas Chataghalala Munthali and Frank Ngalande cautioned that devaluation should not be the path to take because that would cause more harm than good.
My position has been that if you devalue a currency amid exchange controls you create a flourishing parallel foreign exchange market.
Devaluation is a double-edged sword, painful prescription, so to speak. It is soothing to note the new thinking from RBM and my fervent prayer is that with time “the patient” will respond to the treatment.
Meanwhile, to survive the tough times it will be important to tighten belts, review one’s lifestyle and make appropriate changes as it can no longer be business as usual.
