Malawi: Economics of a drunk

THE TWISTER

BY BRIAN LIGOMEKA

Once upon a time, The Twister loved to enjoy his favourite beer so much; perhaps much better that one notorious dictator who one day took pleasure of drinking beer with street vendors in a stadium when a stone-throw away, people were mourning the deaths of freedom fighters.

In those olden days, The Twister would spend K50,000 on expensive beer in an up-market bar at  night and start regretting the following morning. His groaning over his impecuniousness never helped him in any way. It was economics of a drunk. In economics of a drunk, a dipsomaniac becomes wiser when he is totally broke after spending all his monies on alcohol - not with street vendors in a stadium-  but rather with pretty damsels  in an exclusive bar.

While The Twister dropped the habit years ago, it seems some policy makers practise economics of a drunk to the fullest. This week’s devaluation of the kwacha is more or less the application of economics of a drunk.

 Let me twist the mater in this way. While 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 intractable obsession for one or two assumptions of monetarist theory has attracted lots of criticisms with other economist failing to predict where he is leading this country to in terms of economic destination.

His previous 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 portrayed him as a cunning student of monetarist 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 Mutharika never resisted insisting on his monetarist views in form of executive orders. His stand on the value of the Kwacha was 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.”

Mutharika’s view has always been in tandem with what some monetarists argue that an increase in the money supply will affect mostly prices, not output. Like Mutharika’s thinking, monetarists’ 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.

Had we listened to both local economists and our bilateral donors on the issue of Kwacha value when our economy was ‘booming’ the devaluation would have a positive impact, but like a drunk who becomes financially wiser when he is penniless, the recent devaluation will have some repercussions. The issue is simple - the positive impact of devaluation usually relies on the state of the economy and hence the ill-timed devaluation will lead to inflationary pressures.

The Twister is not alone in doubting the benefits of an ill-timed devaluation. One commentator Ben Sodza shares my fears. “Devaluation of currency for an ailing economy without production capacity for all its consumer goods is bad news because country relies on imported goods to supply its consumers. This means paying in foreign currency to procure the goods. If an economy can manufacture all its consumer goods and have surplus to export, devaluation becomes a joy stick that one plays with to manipulate sales of exported goods to dominate the external market; and in such case the local people are not affected.”

Sodza quizzes: “What does this devaluation affect and what else is devalued at the same time?”  He quickly points out: “All banks saving devalue translating into loss of purchasing power.  Pensions on all retired devalue [which also translates to reduction] of buying power.”

What else is affected? Pension contributed funds devalue, lowering standards of pensions, life cover Insurances devalue and premiums go up.

Furthermore, people in the village and unemployed masses suffer because their money loses buying power and people are in turn impoverished; and Sodza further adds: “Not all employers respond with salary adjustments to match devaluation [as the result] salaries lose value.

The point is that this poorly-timed devaluation may end up being inflationary and will not add much-need benefits to the economy. It is economics of the drunk who becomes wiser when he is totally broke instead of being wiser when his is financially sound. In our case, we seem to see the benefits of devaluation when the economy is plunging into a crisis and we will not reap the benefits that well-calculated devaluations generate. Devaluing the Kwacha when our tobacco is doing so poorly at the Auction Floors, the prices of cotton are also low, IMF, Britain, Germany and many other donors have closed financial taps is just like economics of a drunk of becoming wiser when one is broke.