The Malawi Devaluation: The Hard Way, the Only Way

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    Is Malawi ready to experience this again?
    July 20, 2011 demo: Is Malawi ready to experience this again?

    There is time when we used to watch a film named ‘the hard way the only way.’ As the name suggests, it was all about having no more options but the deadliest one. Those that have watched it can bear witness that it is another serious but also comic film. But this writing is not about films as we have better things to do than watching films now, one of which is the much touted demonstration on the 17th of January 2013.

    As to why people will demonstrate everybody knows with a few exceptions. It will not do us any harm if we are having equal footing in this matter, and let me just pick one item from the six points suggested by the Consumers Association of Malawi (CAMA) boss John Kapito. Key among the issues beckoning the mass protests is the rising cost of living which is believed to have been induced by the devaluation of Malawi kwacha by almost 50 percent that the Government effected in May 2012.

    Many economic experts have alluded to the fact that it was a necessary evil, Malawi could have not done without the devaluation. This is where my film “the hard way the only way” sounds synonymous. Even the CAMA Boss, who is being seeing as key orchestrating the January 17 protests, acknowledged that Malawi would have been almost inhabitable if it were not for the devaluation. But why is the pill so bitter that we cannot swallow it? Were the policy technocrats (the treasury and the Reserve Bank of Malawi) not aware of the consequences of the devaluation? The simple answer is that, this is part of the price every nation is supposed to pay when undertaking economic reforms.

    Economic policies have a connotation of prescription or dosage that one gets from a doctor, there are no half measures neither are there midway abandonments. Examples are plenty, those that stop taking ARVs or TB treatment midway the results are never exciting, so are economic issues especially policies. In our situation to have devaluation and expect prices to remain low, should be a source of laughter to the Economists. Again fixing the exchange rate at the new devalued value could have been sitting on a time bomb as we had such a situation but did not work before. Another suggestion is that the exchange rate should be managed; this is another impossibility because those that have read anything on exchange rate regimes will agree with me that managed exchange is a hybrid of fixed exchange rate that why it is called dirty float.

    Exchange rates are essentially of two types, fixed exchange rate and floating exchange rate the third one is a combination of the two called a dirty float (others prefer calling it managed float). Malawi has tested all these exchange rates at different times especially in the period between 1994 and today. The freely floating exchange rate is the one preferred by most economists as it is considered to be sustainable. Although sometimes economists are not good people, they forget that the end result of any macro-economic decision should benefit a common man. This floating exchange rate they have been preaching is not doing us little good now.  Fortunately or unfortunately the conditions that make the floating exchange rate preferable seem to fit well the Malawi scenario.

    A synopsis of the managed exchange rate that other quarters are proposing that could have been the best alternative is that – as it combines the features of fixed and freely floating exchange rates, key in the fixed exchange rate is that the government, in our case the Reserve Bank of Malawi should have a buffer of foreign currency to support the management of the exchange rate. In this exchange rate regime a band is proposed within which the exchange rate is supposed to float, let us say $1= (K350 to K400). The buffer of foreign reserves is required to prevent the exchange rate moving out of the band such that when the exchange rate is close to the upper limit, the K400 end, the government is supposed to release foreign currency into the economy technically match the supply with the demand for forex thereby suppressing the exchange rate surge.

    The critical issue for the sustainability of this dirty float exchange rate is the availability of foreign currency to be supplied when it is needed. On this point not only the writer but everyone that has been in Malawi since 2007 can agree that Malawi does not have the needed forex and that is why it failed to sustain the exchange rate regime that preceded the current one. This confirms that Malawi as a country, politics aside, cannot have a managed or a fixed exchange rate because it does not have the prerequisite, which is vital for the sustainability of the two said exchange rates. To this far, we just have to forget that option of managing exchange rate.

    Another serious problem with the fixed and managed AKA dirty float is that, it is subjected to speculative attacks especially in our condition that forex dealers and the general public know that the country does not have enough forex reserves. To send the fixed or dirty exchange rate regime to the early grave, it will just require some few millionaires to demand more forex and if they will not get the forex they require, that will mean the fixed or managed exchange rate regime is finished and will have the same situation where the black market exchange rate will be two times higher than the bureau or commercial bank rate. In the current free float the speculative will not happen as the exchange rate will be moving higher if the demand for forex is increasing. Therefore, the current exchange rate regime in Malawi is what is feasible and sustainable, though it is a hard way.

    That said; problem identification without suggested solutions is an insult to the audience. Unfortunately, most shortcuts are wrong cuts, the only way out of our problems is a hard and very long way and that is capital accumulation followed by sound investments that should increase output in the long-run. What we should do as a country in order to ensure that someday, be it five, ten, twenty years to come this forex problem should be history, is to do whatever we can to enhance exportation of goods. This is considered to be the sustainable way of earning forex atleast in the circular economics which is dubbed conventional. This has been tried and proven, by other countries; yes, but don’t we have other means? Then go the Islamic way, another hard way at least in Malawi where we don’t want to see new things. This will be my next stop in the next article.

    The forex crisis in Malawi and Solutions found in Islamic Finance

    This article has been written by Boyd Abdalla Hamella, a Malawian Student at the University of Birmingham in the United Kingdom, studying Master of Science – Economics majoring in International Money and Banking (MSc Economics-International Money and Banking).

    The views expressed in this article are his personal views and does not necessarily represent those of Malawi Muslims Official Website nor its editorial policy.

    1 COMMENT

    1. Very excellent analysis.Demostration will not be a solution to current problem.Only the Gvt should be advised to put in place tight measures to control the few forex.Advise the Gvt to request the world bank,IFm etc to cunsion the devaluation at the mean time till we start selling our tobacco.Advise the Gvt to stop fooling around as if everything is okey.If Gvt fails now then its not long time we are going for Election.Dem.its not a solution,This country is too poor to contain and loose meager resources through demos.If the Gvt continue misusing the countries resources,2014 is the answer not demos.

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