TWISTER
BY BRIAN LIGOMEKA
The arrogance of those in power has borne so many sour fruits such as retrenchments, companies’ closure, the soaring unemployment, the rising prices of goods and services, as well as acute forex and fuel shortages. If you are wondering about the arrogance I am referring to, as far as I am concerned besides the expulsion of the British top diplomat to Malawi, another act of arrogance was the conducting of an experiment called zero-deficit budget, a term I have even questioned because in my economics class I learnt about zero-based budgeting and nothing about this concept called zero-deficit budget.
The outcome of the experiment called zero deficit budget is a disaster as it has backfired with all sorts of repercussions. The sight of fuel queues snaking hundreds of metres on various roads that lead to filling stations and women sleeping at Admarc depots waiting for subsidised fertilisers give a very realistic reflection of how the experiment called zero-deficit budget has boomeranged and should be abandoned.
The arrogance that lead to those in authority to over-value the economic and political resilience of this country just because they have been blinded by power after their personal finances improved tremendously within few years - far beyond their earned income, and thought the country does need donors including having a programme with International Monetary Fund (IMF) has not helped matters.
I don’t understand why we have been refusing to devalue our currency and revise our growth targets as advised by the IMF when currency devaluation is not a new phenomenon. Some literature by the Reserve Bank of Malawi clearly explains that the country has been devaluing its currency over the years and the management of exchange rate in Malawi has been pursued with some major policy objectives in mind. The policies include: attainment of growth in real income; maintenance of a viable balance of payments position; and attainment of stable domestic prices.
It is on record that the use of the exchange rate as an instrument of monetary policy began as early as 1965 when the Reserve Bank of Malawi became fully operational. Soon after attaining self rule from Britain in 1964, Malawi introduced its own currency. For some years soon after independence, the Malawi currency was pegged at par to the British pound sterling and this continued until November 1973.
One paper by the central bank says between1965-1973, the Malawi currency moved in tandem with movements in the British sterling, such that when the latter was devalued by some 14 percent in November 1967, the Malawi pound was also devalued by the same magnitude.
History has it that from 1973, Malawi authorities responded to the movements in the international currencies by de-linking the Malawi kwacha from the British pound, and pegging it to a trade-weighted basket of the British pound and the US dollar. In this system, the Reserve Bank fixed the exchange rate by setting daily buying and selling rates for the US dollar and the British pound in the light of foreign exchange market developments.
Those who have seen many rains can recall that around 1980s, the country’s economy faced several shocks, which resulted largely from weak external demand for the country's primary products in world markets. Guess what Dr Kamuzu Banda’s regime did in response to the crisis. In April 1982, the kwacha was devalued by 15 percent. This was followed by another devaluation of 12 percent in September 1983.
That was not the end of devaluations. New challenges affected Malawi economy as the conflict in Mozambique between ruling Frelimo and opposition Renamo disrupted Malawi’s traditional transport routes to the maritime ports of Beira and Nacala. From 1984, Malawi had to rely on long overland routes to the ports of Durban in South Africa and Dar-es-Salaam in Tanzania, a change which significantly increased the country's transportation costs thus (Cost, Insurance and Freight) and/ Free on Board margin from only 22 percent in the 1970s to over 40 percent since 1984. This development of using South African and Tanzanian seaports for exports worsened the country's terms of trade. In response to that scenario, Kamuzu administration resorted to active exchange rate changes which saw the kwacha being devalued by 15 percent in April 1985 and a year later it was devalued by 10 percent.
The trend continued with further devaluations of 20 percent in February 1987 and another depreciation of 15 percent in January 1988. Kamuzu administration never stopped on that note as the currency was devalued by 7 percent in1990; and twice in 1992, by 15 percent in March and by 22 percent in percent in July..
Come February 1994, the foreign exchange market was completely liberalized and the kwacha was allowed to float freely. Government’s move was aimed at improving the country's export competitiveness, providing an efficient foreign exchange allocation mechanism; dampening speculative attacks on the kwacha; and restoration of both investor and donor confidence; among other objectives.
The foreign exchange market liberalization resulted in the authorisation of dealer banks to buy and sell foreign exchange at freely determined market exchange rates; and foreign exchange bureaus were authorized to engage in spot transactions with the general public on the basis of exchange rates arrived at with their clients among other developments
The benefits of a liberalised foreign exchange regime are well chronicled. The floating currency ensures that movements of the exchange rate are in line with the market forces of demand for and supply of foreign exchange. In this case, the foreign exchange value of the domestic currency settles at a price, which equates the quantity of foreign exchange demanded to the quantity supplied.
It should be noted that when authorities floated the kwacha in February 1994, the currency immediately plummeted, from its level of K6.70 per US$1 to K9.88 per US$1. By end-November of 1994, the kwacha had depreciated in nominal terms by over 290 percent against the US dollar; 300 percent against the British pound; 279 percent against the South African rand; and 335 percent against the German mark, reflecting spending overruns which led to loss of confidence in the kwacha. Initially, such massive depreciations were viewed as excessive. In fact the general consensus was that the depreciation was more than what was implied by the economic fundamentals.
While those massive devaluations were shocking, but the advantage on the ground was that forex was readily available and there were no fuel queues in Malawi. Between 1995 to 1997 the kwacha was stable and was slightly devalued in 1997.
As were the trends in the past, there were some devaluations and thus from August 1998 to December 1999, the nominal exchange value of the kwacha ranged between K42 to a US dollar and K46. The trend of devaluations continued during the rest of Bakili Muluzi’s regime just as was the case during Kamuzu’s regime.
I have cited all these figures and trends because the administration of President Bingu wa Mutharika treats the issue of devaluation as a strange phenomenon to the extent that one of the issues that led Malawi’s programme with IMF is the issue of the value of the Kwacha.
While some economists look at benefits of devaluation such as competitiveness of exports, which provides a boost for domestic demand and leads to an improvement in the current account deficit, Mutharika looks at devaluation as a ‘dangerous economic animal’ which will trigger inflation.
Mutharika was once quoted: “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 monetarism thinking tends to ignore the fact monetary policies do not exist in a vacuum but in a macro-economic environment. The question is: With the rising prices of goods, forex and fuel shortages coupled with our diplomatic gaffes, are we benefiting anything from an over-valued Kwacha?
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