Malawi, despite its current Tobacco sales, has a 24% inflation rate, even before the latest move. Sometimes countries get trapped in a dismal cycle in which high inflation causes the country’s exports to be uncompetitive, prompting a devaluation that only leads to more inflation and so on.
Competitiveness is usually only restored by a decline in real wages. This can be achieved by having nominal wages fall while the exchange rate is unchanged (call it plan A), or by having wages fail to adjust to the inflationary effects of a devaluation (plan B). Either way, we come back to a standard of living decline.
Malawi’s has a negative trade Balance when you compare imports versus exports. Analysis Done by Michigan State University found Total Exports $1,207,984,155 and Total Imports $2,844,625,507 producing a trade Negative Balance of -$1,636,641,352.
Almost all the countries of the world have devalued their currencies time to time to achieve certain economic objectives. Following are the main objectives of devaluation:
1. To Encourage Exports:
Devaluation policy is adopted to increase the exports of the country. As the currency of any country is devalued, the commodities of that country become cheaper for the other countries and they increase their demand.
2. To Discourage The Imports:
As the currency of any country is devalued the other countries goods becomes costly to import from that country. So the people reduce their demands for foreign goods.
3. To Correct The Balance Of Payment:
When the balance of payment of any country is unfavorable the devaluation policy is adopted. When the currency is devalued, the value of imports increases but the value of exports will be greater than the value of imports; we will say that the balance of payment is favorable.
Malawi’s current money crisis however is not planned. This decline in value negatively affects our economy by creating instabilities in exchange rates, meaning that one unit of the Kwacha no longer buys as much as it used to in another. To simplify the matter, we can say the crises developed as an interaction between investor expectations and what those expectations cause to happen.
When faced with the prospect of a currency crisis, other central bankers in a fixed exchange rate economy have tried to maintain the current fixed exchange rate by eating into the country’s foreign reserves, or letting the exchange rate fluctuate.
Why is tapping into foreign reserves a solution? When the market expects devaluation, downward pressure placed on the currency can really only be offset by an increase in the interest rate. In order to increase the rate, the central bank has to shrink the money supply, which in turn increases demand for the currency. The bank can do this by selling off foreign reserves to create a capital outflow. When the bank sells a portion of its foreign reserves, it receives payment in the form of the domestic currency, which it holds out of circulation as an asset.
Propping up the exchange rate cannot last forever, both in terms of a decline in foreign reserves as well as political and economic factors, such as rising unemployment. Devaluing the currency by increasing the fixed exchange rate results in domestic goods being cheaper than foreign goods, which boosts demand for workers and increases output. In the short run devaluation also increases interest rates, which must be offset by the central bank through an increase in the money supply and an increase in foreign reserves.
As mentioned earlier, propping up a fixed exchange rate can eat through a country’s reserves quickly, and devaluing the currency can add back reserves. Many critics have accused the Mutharika administration of manipulating the currency by using the above tricks and had predicted it was just going to be a matter of time before the chickens came home to roost.
Unfortunately for banks, but fortunately for you, investors are well aware that a devaluation strategy can be used, and can build this into their expectations. If the market expects the central bank to devalue the currency, which would increase the exchange rate, the possibility of boosting foreign reserves through an increase in aggregate demand is not realized. Instead, the central bank must use its reserves to shrink the money supply, which increases the domestic interest rate. This appears to be the cycle Goodall Gondwe and Peter Mutharika find themselves in.
Many have suggested that Malawi’s currency woes are due to reduction in foreign aid reductions that were started during the latter part of President Bingu WA Mutharika’s reign, improved slightly during Joyce Banda’s Presidency and is back on the decline once again and thus causing the FREE falling of the Kwacha.
Giving alms to Africa remains one of the biggest ideas of our time — millions march for it, governments are judged by it, celebrities proselytize the need for it. Calls for more aid to Africa are growing louder, with advocates pushing for doubling the roughly $50 billion of international assistance that already goes to Africa each year.
Yet evidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investment. It’s increased the risk of civil conflict and unrest (the fact that over 60% of sub-Saharan Africa’s population is under the age of 24 with few economic prospects is a cause for worry). Aid is an unmitigated political, economic and humanitarian disaster.
A country like Malawi faces bigger challenges as it lacks natural minerals and cannot go the Botswana way or even the path neighboring Zambia has taken by relying heavily on their mining sectors.
For Malawi to move forward after over 50 years of independence and declining prospects solutions should be sought from all quarters. The Malawi Opposition and Social society instead of spending more time being critical should offer solutions. The Malawi Government should also create an environment that allows these organizations including its Diaspora to help with solution formulations.
People in power should realize that while they were elected, they do not have all the answers. After 50 years of failed economic policies by every government that has been in power, it is time we admitted that no one government has solutions, however together as Malawians we can come up with solutions. There is so much energy lost attacking each other and questioning every move one takes. The result being where we find ourselves. Poor and getting poorer. Hospitals without basic medicines and equipment to treat everyday ailments. People dying from curable diseases. Declining security environment where foreigners and Diaspora find it difficult to invest in the economy.
All Malawians should feel an obligation to the country. It is high time we all start supporting a cause larger than ourselves. Malawi is a country blessed with smart people. The question becomes than why are we still here? After failed five governments, we cannot continue to do the same things we have done in the past 50 years and expect a different result.
Sources: Wall Street Journal, Wikipedia, World Bank
The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of The Maravi Post