Of Malawi president's obsession for monetarism and local currency value

THE TWISTER

BY BRIAN LIGOMEKA

While Malawi President Bingu wa Mutharika’s economic policies previously were swinging from the foundations of Keynesian principles on one end to those of monetarist philosophies on the other end, his current intractable obsession for one or two assumptions of monetarist theory, makes it extremely difficult to predict where he is leading this country to in terms of economic destination.

His resilient stand on the value of the Kwacha that it should not be devalued despite frantic admonition from different economists and the International Monetary Fund portrays him as a cunning student of monetarists theory who incontestably believe that monetary policy should be firmly manipulated as the best way of shaping the economy because money supply affects macroeconomic outcomes such as Gross Domestic Product growth, inflation, unemployment, and exchange rates.

While in free market economies, central banks are charged with the duty of being the hub of monetary policy, here at home once in a while Mutharika pushes his monetarist views in form of executive orders. His stand on the value of the Kwacha is a good case in point.

Mutharika stand has always been: “The devaluation of the kwacha will only benefit a few individuals, and they are non-Africans who are here. They want to push this proposal because what they did was to go to the market and convert their kwacha to US dollars and kept them. Suppose we devalue to K180 per one US dollar, they will quickly offload their dollars and they will make huge sums of money. These are the ones to benefit.

He contends: “I have resisted devaluation and will continue to resist devaluation because I need to give the business community and everybody in Malawi a stable foreign exchange regime. I am an economist and I understand and follow what is happening around the world. I am not going to devalue the kwacha to please one or two people.”

Mutharika’s view is in tandem with what some monetarists argue that an increase in the money supply will affect mostly prices, not output. Like Mutharika’s thinking, their view is that increase in the money supply simply raises inflationary expectations and as a result push nominal interest rates up. Generally speaking, monetarists believe in fixed money supply targets, or in regulation of how much to change the money supply. This is slightly different from the beliefs of Keynesian economists who have faith in more flexibility or discretion instead of being tied to rigid rules and regulations.

While Keynesians would advocate for discretion and flexibility on how we value the Kwacha, Mutharika’s views are nothing but bringing the monetarist assumptions to detrimental extreme.

The Twister believes that besides our diplomatic gaffes, human rights abuses and violation of our own Constitution, one error of judgement the current administration is making is that of implementing some assumptions of monetarist thinking without considering our context as one of the not-so-rich countries in the world. Our obsession for monetarism, which is persuading those in power to keep on emphasising the role of government in controlling the amount of money in circulation by, among others, tweaking exchange rates is certainly annoying some bilateral and multilateral partners who believe that our stand on the value of the Kwacha is wrong and therefore cannot support us financially.

I am not an economist, but my word of advice as a patriotic Malawian to the Mutharika administration is that economic policies should be implemented without considering the macro-economic environment. We can be obsessed with one or two aspects of monetarist thinking, but our assumptions should be implemented with humility while listening and mending fences with donors; even if it means devaluing our currency as dictated by market forces, a position which IMF has been advocating for.