• Sun. May 28th, 2023

No quick fix to the broken economy: devaluation the way to recovery

May 27, 2022

By Malawi Exclusive

The Reserve Bank of Malawi has announced the devaluation of the country’s currency with 25 percent. According to the Press release dated 26 May, 2022 the devaluation is with effect from Thursday 26, May.

Expectedly the announcement has stirred the political emotions with the opposition zealots taking turns accusing President Lazarus McCarthy Chakwera for the devaluation. The timing of the devaluation has coincided with the IMF visit to Malawi. The Brentwood Institutions team is in the country to be appraised of the progress the Malawi government has made on the Extended Credit Facility (ECF).

As the world is going through the economic crisis this should not be surprising at all. This is a global crisis caused by the Ukraine war and Covid-19 but in our case, for a larger part, the situation has been worsened by the clumsy handling of the economy by the Democratic Progressive Party (DPP) led government.

According to the Nation newspaper of 5 May, 2021, the DPP administration misreported on several occasions on gross reserve asserts and net international reserves (NIR) for the period between 2018 and 2019 which was a bone of contention between the IMF and the new administration.

Briefing journalists in Lilongwe at the end of his mission to Malawi on 4 May 2021, former IMF Director for Africa Abebe Selassie said the fund was seriously concerned about misreporting case on some targets during the implementation of the cancelled ECF during the DPP administration
He said: “The IMF takes misreporting cases seriously and, in this regard, I appreciate the authority’s efforts in delivering on the corrective actions.”
This statement by Selassie is very interesting because a lot has happened between that time and now. Some have forgotten the wound the DPP inflicted such that whenever people brings it into the discussion as the cause of the current economic struggles, some think the DPP is only being made a scapegoat for the current economic mess. But this was an expatriate, without any political inclination in Malawi, pointing out the genesis of the problem. In any case what did he stand to gain by implicating DPP?
But that being said, devaluation is the necessary pill to cure or lessen the current economic malady. As rightly acknowledged by the former Minister of Finance Goodall Gondwe, government decision to invite the IMF to assess the progress of the Exchanged Credit facility is correct and the only option as it will enable government and the IMF to agree on a roadmap for economic recovery.

According to this internationally acclaimed economist who worked with the IMF, the vising team will likely propose solutions. He said some of the suggestion will not be palatable but with strict discipline the economy will normalize in the foreseeable future.

‘’First of all, I would like to tell you that this is not the first time we are in this situation. We were in a similar situation during Kamuzu. We experienced the same problems in our (DPP) time, but we recovered from those problems.
Certainly, the IMF propose a number of solutions to us. Some of them will be painful [we will think they are bad] but I think it will be good for us to follow with discipline, so that we get out of the economic difficulties we are in. I am hopeful that this problem will be solved’’
As highlighted by Goodall Gondwe we have been in the same situation before. Perhaps the following facts will help to refresh our minds:

President Bingu Wa Mutharika found dollar at MK64 and left it at MK 150 (MK250 on black market) in 2012 after devaluing it with 25 %. President Joyce Banda was ordered by the IMF to devalue the Kwacha with 50%, she devalued it by 33%. She left the office when the U.S Dollar was trading at MK450 and MK500. In 2014 President Peter Author Mutharika bowed down to the pressure from the IMF.
It was that devaluation which gave birth to the K2000 bank note. He left office when the kwacha was trading at MK824 with the US Dollar. This breakdown does not mean devaluation is good but it’s a reminder that we have been in this situation before and we recovered. Whichever way devaluation is the necessary evil especially to our fragile economy.

Goodall Gondwe’s honest forecasting needs to be reflected soberly. Apart from being an accomplished economist, Gondwe has political interests to protect but he chose to be objective in his assessment. Being an influential figure in DPP he could have opted to paint a gloomy picture for this country just to give his party a leverage in the next elections.

By saying that the “IMF will come here and propose solutions to us. Some of them will be painful but we will have to follow them with discipline if we are to recover from the economic problems”, Gondwe was not frightening us but he was preparing our minds for any worst news possible from the proposed solutions from this money lending institution.
Now, almost everyone can agree that devaluation is not good but at the same time it is not necessarily bad.
President Chakwera inherited a bruised economy in need serious stitches. Devaluation, as bad as it may seem, the move is timely as it will.
As was expected naysayers have gone to town celebrating the tumble of their own economy. But here is the thing, President Chakwera would not have loved to go through a painful period but like a cancer person who has been told that he needs amputation or let the cancer spread all over the body and die slowly.

Now there is compelling argument being advanced by Chakwera’s critics. They are advancing the narrative that President Chakwera should have been stubborn as Bingu was on devaluation. But in what did his stubbornness amounted to? The country was hit by forex scarcity which led to the acute shortage of fuel and the erratic supply of basic commodities such as sugar. Bingu died a sad man because he failed to resuscitate the economy he worked so hard to build for years.

Surely there is no quick fix to the economic problems. Devaluation is a bitter pill but is necessary for the sustained stability of our economy in the long run.

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