Development & Aid, Economy & Trade, Eye on the IFIs, Trade & Investment

Hopes To Heal Economy Through Devaluation, Which Has Hit Poor Hard

LILONGWE, May 17 2012 (IPS) - As Malawi’s poor struggle to afford food and other staple items since the 48 percent devaluation of the local currency against the dollar, economic commentators are optimistic that the move will provide an opportunity to boost the country’s export market.

A group of farmers queuing to buy fertiliser outside a shop in Bvumbwe, southern Malawi after the local currency was devalued. / Credit:Claire Ngozo A group of farmers queuing to buy fertiliser outside a shop in Bvumbwe, southern Malawi after the local currency was devalued. Credit: Claire Ngozo

On May 7, Malawi’s President Joyce Banda made a decision to devalue the Kwacha from K168 to K250 to the dollar.

The lowering of the currency against the dollar has hit locals hard. Malawi is one of the poorest countries in the world: 74 percent of the population of this southern African nation lives on less than 1.25 dollars a day, and nearly one in 10 children die before their fifth birthday.

The devaluation of the Kwacha created panic among consumers who rushed to stock up on basic food items such as maize flour, cooking oil and rice as the price of products increased by an average of 50 percent.

Consumers suffered a further blow on May 11 as the prices of fuel and electricity also rose by 30 and 63 percent respectively.

“The devaluation has made us poorer than before. Our salaries remain the same, so how can we afford to pay twice as much on basic necessities such as maize flour?” asked Mada Mayuni, a civil servant who works as a copy typist in the capital, Lilongwe.

Consumers suffered a further blow on May 11 as the prices of fuel and electricity also rose by 30 and 63 percent respectively.

“The devaluation has made us poorer than before. Our salaries remain the same, so how can we afford to pay twice as much on basic necessities such as maize flour?” asked Mada Mayuni, a civil servant who works as a copy typist in the capital, Lilongwe.

Mayuni is a widow and looks after seven children aged between four and 16.

“I don’t know how we will survive because my salary is only enough for transportation to and from work. Maybe I should move to the village and try subsistence farming,” she told IPS.

Matthews Chikankheni, the president of the Malawi Confederation of Chambers of Commerce and Industry, a partnership of enterprises and associations representing all sectors of Malawi’s economy, told IPS that although the average person was suffering, the devaluation of the Kwacha was a necessary adjustment that should be welcomed as it would boost the country’s export trade.

“This is a chance for export traders to improve their earnings. The devaluation means that exports will be cheaper and imports more expensive, and as a country we need to take advantage of this situation and export more,” said Chikankheni.

By devaluing the Kwacha, Banda was responding to requests that the International Monetary Fund (IMF) and local economists had made to the country’s late President Bingu wa Mutharika. However Mutharika had repeatedly refused to take the step that economists believed would have saved the country’s failing economy.

Malawi’s donor relations suffered greatly following accusations that Mutharika’s government failed to respect the human rights of lesbian, gay, bisexual and transgender people and the right to freedom of the press.

Donors refused to release up to 400 million dollars and the United States suspended a 350-million- dollar grant. At the time, almost 40 percent of Malawi’s national budget was donor-dependent. Many donors have since pledged to help Banda restore the country’s economy.

The devaluation of the Kwacha and the liberalisation of the foreign exchange market are expected to contribute to the government’s attempts to reach an early agreement with the IMF in order to unlock donor funds.

Chikankheni said that the devaluation would boost demand for domestically-produced goods and discourage the current dependency on imported consumer goods, which have now automatically risen in price.

He added that the increase in exports would mean that foreign exchange would be easily available in the country and would result in an eventual improvement in the economy, which would trickle down to the people.

Currently Malawi’s annual imports, which are estimated to be two billion dollars worth of goods such as electronic items, groceries and furniture, exceed its exports. The country exports 1.2 billion dollars of agricultural products like tobacco, tea, sugar and groundnuts, according to the National Statistical Office.

Chikankheni is optimistic that the devaluation will aid the growth of the tobacco industry.

Tobacco is the country’s main revenue earner, accounting for up to 60 percent – or 950 million dollars – of foreign exchange. According to the Ministry of Agriculture and Food Security, Malawi’s tobacco accounts for five percent of the world’s total exports.

Dalitso Kubalasa, the executive director of the Malawi Economic Justice Network, a coalition of more than 100 civil society organisations that promotes economic governance, told IPS that the devaluation would make Malawi’s export products more competitive on the international market.

“On the export front, the devaluation will lead to increased demand for Malawi’s exports in the short run. In the long run, this is expected to stimulate production and thus lead to increased production of exportable goods … thereby generating foreign currency,” said Kubalasa.

He added that because the prices of imports had automatically risen and become unaffordable for some, the situation would motivate locals to substitute these goods with commodities that can be produced locally. It would provide an incentive to local industry, he said.

But he admitted that the devaluation would affect the country’s middle class and poor.

“We all have been through desperate times…perhaps we might have to even brace ourselves for more,” said Kubalasa. “But on the brighter side, we still need to understand that something needed to be done fast to put a stop to the downward trend of the economy before it got to a point of no return.”

He said he was hopeful that the devaluation was not the only solution to Malawi’s economic woes.

“For the devaluation to be effective, it needs to be done alongside strategic and well-focused supporting intervention measures,” said Kubalasa. (END)

 
Republish | | Print |
X
Development Deadline 2015
  • The latest in development, gender equality and poverty alleviation from our local journalists

Weekly Newsletter