Reject devaluation pill
and die of inflation
BY BRIAN LIGOMEKA
THE TWISTER
I have just realised that Malawi has hundreds of economic commentators. Some party leaders and media houses have started giving platforms to witchdoctors, traditional leaders, grave diggers and minibus touts to give lectures to the masses on issues of the economy.
Out of the blue, every Jim and Jack who can parrot the cliché: “Devaluation is evil because it causes price increases,” is now an economic commentator.
The mere fact that grave diggers, minibus touts and witchdoctors are paraded and given media space to make a huge joke of themselves when commenting on devaluation, demonstrates that the economy is in a mess. If all was well, grave diggers would have been busy concentrating on the noble work in grave yards, while witchdoctors would have been busy looking for potent herbs in the bush and not anchoring panel discussions on devaluation.
I am not sure whether traditional leaders, witchdoctors and minibus touts in other countries are offered podiums and media space to speak as if they are fathers of economics, the way Milton Friedman or Adam Smith are regarded.
While the new-availed commentators believe macro-economics is all about devaluation, none of them seems to have capacity to comment on other important economic fundamentals.
As far as they are concerned economic commentary is about demonisation and denunciation of devaluation. I have no problems with their criticisms because I know devaluation has its own merits and demerits, but what is irritating is to be ranting if as if micro and macro-economics only revolves around devaluation.
Everybody can chant anti-devaluation choruses at podiums, in news bulletins and phone in programmes, but there are other economic beasts which will haunt Malawians, more than currency devaluation.
Anti-devaluation campaigners can stand on mountain tops to declare that devaluation triggers price increases. But general price increases or inflation as it is called in economic is not only caused by the much-hated devaluation alone.
There are other causes. Some causes are perpetrated by idiotic and nonsensical fiscal and monetary policies by arrogant leaders.
If I were a geography teacher in primary school, I would have taught my students that devaluation is like a rivulet (tributary) emptying its water in a crocodile-infested, deep and huge-river called inflation. Strangely Malawians tremble at the sight of the stream called devaluation instead of being equally scared to the bone at the sight of inflation, whose consequences to the urbanites and the villagers, the employed and the unemployed, the industry and even projects are dire.
What is inflation? Forget about the jargonistic textbook definition. Simply, put inflation is when K1000 which used to buy a 50 kilogramme bag of maize in March last year, cannot do the same this year and instead you need K3000 to buy the same bag because the price has gone up. While this is a reality, others assume a strong Kwacha can prevent prices of goods from going up.
If you love usipa like I do, inflation is when the K1165 which was buying 1 kg of usipa from Limbe Market last year is not able to do so and instead you need a K2,000 to buy the same quantity of usipa. In this scenario no one should lie to you that the strong kwacha is protecting Malawians from price increases, because it is miserably failing to do so.
Even those who love a cup of tea are hard hit because with K120 last year they were able to buy a loaf of bread, but this year the same amount is not enough to buy a loaf of bread. They now need K200. Courtesy of the same inflation, 1kg of sugar which was going at K165 is now K200.
Traditional leaders can be paraded at podiums and on TV to mock devaluation, but when returning to their homes, inflation will spit fire at them as the price of fuel and bus fares is up and they will feel the pinch of exorbitant transport costs.
Do you remember how inflation affected our cousins in Zimbabwe?
Continued inflation coupled with the lack of forex resulted in loss of confidence in their local currency. The situation that prevailed in Zimbabwe was a good example of how high inflation and later hyperinflation resulted in the citizenry, companies and entrepreneurs lose their confidence in Zimbabwe dollars.
Others have already lost confidence in Malawi Kwacha and our economy. If you don’t believe it, just know that Ethiopian Airways, Kenyan Airways and some other companies are not accepting Malawi Kwacha preferring payments to be made to them in dollars.
Just few days ago the local manager of South African Airways was also complaining how forex shortage is preventing them from repatriating what is due to their head office. Don’t ask me their next move. This is happening when anti-devaluation campaigners continue to assume the Kwacha is a strong and a much-sought after currency.
By the way, how can a strong currency have its highest denomination K500 note fail to buy a meal at a hotel or a bag of maize in the village? Already the Reserve Bank of Malawi wants to print a K1,000 note. The official explanation sounds very convincing and very sensible. But lo, even if the K1,000 note is out today, it will still fail to buy a 50 kg of maize. What does the printing of those K1,000 notes mean when each one of them individually can’t even buy a bag of maize? Perhaps, lessons from Zimbabwe are important. Zimbabwe too when hit by high inflation also attempted to salvage the situation by printing their local currency in of all sorts of denominations, but that never rescued their economy.
But what happens when the quantity of money is increased in this manner? Too much money starts chasing too few goods and the purchasing power of money decreases, which leads to further rise in prices. Whether there is devaluation or not, in such a scenario it should be known that the rise in prices is merely an effect of inflation and the real cause is that the money supply has been overextended.
The loss of confidence in the local currency in Zimbabwe resulted in the ‘dollarisation’ of the economy. The tough speaking Uncle Bob (Robert Mugabe) failed to tame inflation and the dollarisation process was legalised in January 2009, a complete admission that nobody had confidence in the currency of Zimbabwe. Today Zimbabweans conducts businesses in their own country using US dollars, the euro, pounds and rands. Isn’t it ironic that the same leader who denounces and rants against western powers as colonialists uses western currencies when buying food for his family?
What I am twisting?
If Malawi had devalued the Kwacha and secured programmes with IMF and World Bank, reports have it the country stood a chance of benefitting from financial injection of over 500 million US dollars into the economy, and other donors would have unlocked their aid and credit facilities.
But since we hate and reject the bitter pill of devaluation fearing that prices of goods and services will go up, the truth is cost-push inflation, sometimes referred to as "supply shock inflation,” will still kill us.
Because US dollars are acquired on black market at exorbitant rates, those in business pass on the exorbitant prices to consumers. Furthermore, unavailability of forex in our situation is one of the key drivers of cost push inflation or general price increases in our situation.
We should not also ignore that when fuel prices went up recently, other goods also followed suit though there was no devaluation. When government introduced all sorts of funny taxes including those on offals in the much criticised zero-deficit budget, everything else went up in response to the taxes.
What is happening solidifies that cost-push inflation occurs when companies are responding to rising costs (emanating from soaring fuel prices, forex shortage and taxes) by increasing prices to protect their profit margins.
The hatred for Kwacha devaluation can continue up to 2014, but that will not stop high inflation from haunting Malawians. Prices of goods will continue going up with or without devaluation because monetary policies do not exist in a vacuum but in a macro-economic environment, in which they interface with other fiscal policies.
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