In a desperate bid to improve availability of foreign exchange in the formal market and stimulate the economy, the Reserve Bank of Malawi (RBM) on May 27 this year devalued the kwacha by 25 percent.
RBM Governor Wilson Banda justified the move as a necessary evil to align the foreign exchange supply to the macroeconomic fundamentals.
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.
The recent devaluation, which followed the central bank’s earlier interventions to improve foreign exchange liquidity challenges and its effects on the exchange rate, have had little or no impact.
Devaluation has always been a sticky issue in Malawi. I recall between 2010 and 2012 former president Bingu wa Mutharika, now deceased and may his soul continue resting in eternal peace, stood his ground against devaluing the kwacha.
His argument was premised on the fact that the move will 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.
Both devaluation decisions of 2012 and 2022 were done at the height of forex shortages, donor aid freeze and rising prices of goods and services.
It is now almost two months since the devaluation. The reality on the ground is that foreign exchange is somehow available on the formal market, but the liquidity has not improved that much. The spread with the parallel market is also widening by the day.
Post devaluation, the economy has seen an increase in inflows with the average of $6.3 million (about K6.4 billion) traded per day compared to $4.8 million (K4.9 billion) before. But market analysts argue that the increase could as well be attributed to inflows from tobacco sales currently in progress.
Malawian consumers can’t breathe as prices of goods and services have also gone up, largely influenced by the devaluation and subsequent average 34 percent increase in fuel pump prices in June.
In theory, when a currency is devalued, exports from the particular economy are expected to be competitive on the international market, thereby generating more foreign exchange inflows. Imports, on the other hand, are supposed to be expensive.
Some countries do benefit from devaluation decisions, but the Malawi economy is a unique one in that it is usually “nonresponsive”. None of the devaluation decisions in living memory have helped to resolve the perennial problems.
In a paper titled ‘Is Devaluation an Option for Malawi’s Current Debt Challenge’ published before the May 27 devaluation, economists Thomas Chataghalala Munthali and Frank Ngalande warned that devaluation should not be an option as it would cause more harm than good.
My quick take is that devaluation amid exchange controls will always make the parallel foreign exchange market thrive and attractive. Importers are benefiting more because RBM has offloaded some dollars on to the market, in the process enabling some big traders easy access to foreign exchange.
Indeed, devaluation without meaningful exports is a major concern to many a Malawian consumer already struggling with the high cost of living.
Headline inflation rate for June 2022 hit 23 percent, up from 19 percent before the value of the kwacha was weakened.
Some quarters have argued that it is too early to assess the impact of the devaluation, but then, during the same period, consumers instantly felt the pain of price hikes. Either way, the questions we should be asking should include what has the economy benefited? What has the economy been exporting or is exporting?
My conclusion is that the decision to weaken the value of the kwacha may, afterall, have been a misdiagnosis of the problems rocking the economy, especially the foreign exchange market and its management.