IN an article
that was published by The Maravi Post, His Excellency President Bingu wa Mutharika tried to defend his reluctance to devalue the Kwacha any further. Devaluation has been a remedy the IMF and the World Bank has prescribed for many developing world countries with dismal results for the past 40 years.
Reasons why countries devalue currencies are to achieve a relatively low exchange rate for their own currency. As the price to buy a particular currency falls, so too does the real price of exports from the country. Imports become more expensive too, so domestic industry, and thus employment, receives a boost in demand both at home and abroad. However, the price increase in imports can harm citizens' purchasing power
Devaluation, with its adverse consequences, has historically rarely been a preferred strategy. According to economist Richard N. Cooper, writing in 1971, a substantial devaluation is one of the most "traumatic" policies a government can adopt – it almost always results in cries of outrage and calls for the government to be replaced.
Devaluation can lead to a reduction in citizens’ standard of living as their purchasing power is reduced both when they buy imports and when they travel abroad. It also can add to inflationary pressure
Devaluation tends to make interest payments on international debt more expensive if those debts are denominated in a foreign currency (of which Malawi’s debts are undoubtedly in dollars or the Euro), and it can discourage foreign investors. At least until the 21st century, a strong currency was commonly seen as a mark of prestige while devaluation was associated with weak governments.
However, when a country is suffering from high unemployment or wishes to pursue a policy of export led growth, a lower exchange rate can be seen as advantageous. None of these reasons apply to Malawi.
I can almost guarantee that our imports on balance are significantly more than the exports of tobacco, tea, sugar and the newly added uranium.
From the early 1980s the International Monetary Fund (IMF) has proposed devaluation as a potential solution for developing nations that are consistently spending more on imports than they earn on exports. A lower value for the home currency will raise the price for imports while making exports cheaper.
This was supposed to encourage more domestic production, which would then raise employment and gross domestic product (GDP).
If over 40 years this formula subscribed to Malawi and other African countries hasn’t worked, who then benefited? In Malawi, who stands to gain from cheaper imports from Malawi? Who owns the tea, tobacco, sugar and uranium mines? I can almost guarantee you that it isn’t Malawians. The majority of our farms are owned by foreign corporations. The uranium mines are owned by Paladin which was in the news, accused of having
benefited more from unfair contracts it signed with our government. Paladin denies the charge very loudly.
I reluctantly agree with our President that devaluation has no point if it will not raise Malawians standard of living. However, I would advise better communication skills from our leader. We have to separate our audiences. The folks he is aiming for in hierarchy of the IMF and the World bank will use his language to make him look bad and miss the whole point of his very credible reasoning as to why their solutions aren’t just going to work for Malawi.
- The author is the publisher of The Maravi Post