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Devaluation is always a bitter pill to swallow

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By Davis Kanganu:

One of the most significant national topicals that have set the tongues of most Malawians wagging at the moment is the recent devaluation of the Kwacha by 25 percent.

Most Malawians have taken it to social media, dissecting this economic concept of devaluation in a way they understand better.

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Others have even gone a step further to warn others of impending rising prices of goods and services in the wake of the devaluation.

Simply put, devaluation is the deliberate downward adjustment of the value of a country’s money relative to another currency, group of currencies or currency standard.

Countries that have a fixed exchange rate regime or system or semi-fixed exchange rate system usually use devaluation as a monetary policy tool.

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As such, the recent devaluation, whose magnitude is one of the highest in the past decade, will inevitably unleash both positive and negative shocks on the economy.

On May 7 2012, the country also experienced a 49 percent devaluation of the local currency and that was the genesis of a floated exchange regime as the currency was liberalised to allow forces of demand and supply to interplay.

The two devaluations have one major similar objective in nature and that is to correct the seemingly m is a ligned exchange rate market.

In 2012, while the official rate of the Kwacha to the US dollar was around K150, on the parallel market, the same unit of a dollar was selling at around K250.

Similarly, the May 26 2012 devaluation mostly was effected to correct the same misalignment as the Kwacha was trading at around K825 to a dollar officially while on the black market and in almost all foreign exchange bureaus, the same was selling at above the K1,000 mark.

Of course, to a larger extent, the recent monetary move is seen as one way to repair Malawi’s relationship with the International Monetary Fund (IMF), which had recommended the devaluation of the Kwacha currency as one way of reinstating the cancelled Extended Credit Facility (ECF) with Malawi.

But Malawi’s decision to devalue its currency will help the country in the long-term, despite potential short-term agony.

That is why, the decision to weaken the currency is conceived as a necessary evil, particularly given the likely price increases of basic goods and services in the short run.

But in the long run, if nurtured, the move may help the country earn more from its exports on the international market as Malawi exports will now be cheaper in the eyes of international buyers.

Here is an example: If Mr Mbewe from Mponela sells one shoe at $1 (K825 before devaluation), an international customer can now use the same $1 to buy almost two shoes.

And I was pleased to hear from the President himself, who admitted at a press conference at Kamuzu Palace that the decision will hurt Malawians in the short term but the nation will benefit at large.

He said on Tuesday, May 31 2022: “I know that it is painful, but it’s because we are putting a dislocated joint back in its place.”

Both Chakwera and his economic pundits are pretty aware that the realignment of the exchange rate will inflict pain on all Malawians because any increase in the price of imported commodities forces consumers to cut spending. But the devaluation remains an inevitable decision and it is a bitter pill to swallow.

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