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Devaluation: Self-inflicted wound or escape route?

Reserve Bank of Malawi

ON THE RISE—Fertiliser prices

Elube Martin, a 33-year-old vegetables’ seller at Kamuzu Road in Salima District, has no kind words for the current administration, apparently because it devalued the Kwacha two weeks after she sold all her 32 bags of maize.

“I sold the maize, each bag weighing 50 kilogrammes (kg), at K14,000 each because I wanted to use part of the money as school fees for my two sons while the remainder would be used for buying fertiliser and meeting daily needs.

“However, the government’s decision to devalue the Kwacha eroded the value of the money I had at hand, such that I will not be able to buy more than one bag of fertiliser. If the Kwacha was devalued much earlier, I would have sold my bags of maize at a higher price considering that fertiliser prices would rise, too,” Martin lamented.

She may not be far from the truth.

In May this year, before Reserve Bank of Malawi (RBM) Governor Wilson Banda announced the devaluation of the Kwacha by 25 percent, the price of a 50kg bag of fertiliser ranged from K50,000 to K63,000.

For instance, a 50kg bag of Super D, which tobacco farmers use, was selling at K63,000, despite that the leaf, which is Malawi’s foreign top exporter earner, has never been part of the Affordable Inputs Programme (AIP).

This means demand for the soil-enriching commodity is not as high as that of fertiliser that is highly sought after by AIP beneficiaries.

A 50kg bag of Urea, on the other hand, was going at K55,000, with NPK of the same quantity attracting K49,500.

Another farmer, Kasungu-based Mathias Sauzande, is equally downcast.

“I planted soy beans this growing season [2021-22] in the hope that, in 2022-23 I will cultivate maize on the same eight hectares of land. However, I cannot see myself doing that because I already sold my soy beans at K750 per kilogramme.

“The soil is rich in nitrogen, yes, but I will still need to purchase fertiliser that will help the crop produce enough for me and my family to generate profits. However, I do not see myself affording fertiliser because they devalued the Kwacha when some of us had already sold our produce,” Sauzande said.

He said, to make matters worse for him, he may not benefit from AIP in the 2022-23 season because, although he received inputs last season, he is not a member of a cooperative.

This comes at a time the government has reduced budget for this year’s AIP from K142 billion last year to K109 billion.

Chairperson for Parliament’s Committee on Agriculture Sameer Suleman said the country needs 200,000 tonnes of Urea and another 200,000 tonnes of NPK for AIP alone.

“Fertiliser is an essential commodity to the country, such that, generally, the country needs between 600,000 and 700,000 metric tonnes of fertiliser to meet its needs annually.

Sauzande is, however, pessimistic on whether she will be able to buy all the fertiliser the needs.

“People like me will not be able to buy all the fertiliser we need because we have been overtaken by events,” she said.

Malawi University of Business and Applied Sciences-based lecturer Betchani Tchereni said it would be difficult for subsistence farmers to make the best out of agriculture this year, mainly due to devaluation of the Kwacha.

“In this growing season [2022- 23], when the government is shifting from household-based AIP to cooperative or group-based AIP implementation, it will be tough for the individual who will go it alone.

“Already, the price of farm implements such as holes has gone up. I bought some holes recently and the cost ranged from K5,000 to K6,000. So, it is not just the price of fertiliser that has been impacted by devaluation; prices of farm implements such as hoes and others have also risen. Unless the government digs deeper into its kitty, the growing season will be a difficult one,” Tchereni.

He said, moving forward, the government has to devise ways of ensuring that no one exports goods in raw form.

Tchereni said value addition would help Malawi recoup money, which it can use for developing the country.

“The other thing we have to look into is ‘where do we market products and in what currency?’ Middlemen buy raw produce from farmers in Kwacha and then sell to South Sudan, India and other countries in United States Dollars. They are the ones generating money in United States Dollars while the producer is given Kwachas. We have to ensure that local producers are getting United States Dollars for them to benefit from their labour,” Tchereni said.

He, however, said the benefits of devaluation would be reaped in the medium to long-term.

In the meantime, the Ministry of Agriculture is not coming out clear on how many people will benefit from this year’s AIP and how much farmers would be required to contribute per 50kg bag of fertiliser.

The ministry’s spokesperson Gracian Lungu said the ministry would not be commenting on anything to do with AIP until a reform paper that has been drafted on the programme is adopted.

“The ministry developed an AIP reform paper and, once this is adopted, we will tell the public about how we are to approach this year’s programme. For now, [we are making] no comment on AIP,” he said.

The ministry recently announced plans to channel all agricultural services, including implementation of the AIP, through farmers clubs.

The Ministry of Agriculture announced the new policy direction following recommendation by President Lazarus Chakwera throughout his nationwide crop inspection tours but agriculture experts have asked government to tread carefully on the plan, saying farmers have to be properly engaged and organised the clubs are to bear fruit.

The Kwacha was devalued as part of desperate attempts by the government to have a new International Monetary Fund (IMF) Extended Credit Facility (ECF) programme in place to help cushion it from prevailing economic woes.

In a communication to authorised dealer banks (ADBs), dated May 26 2022, RBM Governor Wilson Banda said the decision had been arrived at to realign the exchange rate with economic fundamentals.

Banda said imbalances between supply and demand had been prevalent in the domestic foreign exchange market evidenced by low foreign exchange supply, declining official foreign reserves and widening spread of rates on the market.

This, according to Banda, led to the misalignment of the exchange rate to economic fundamentals.

“In order to curb the practice and dissuade hoarders of foreign currency from this practice, the bank is informing ADBs to adjust exchange rate by 25 percent from the mid-rate as of 26th May 2022 to align to around the market clearing level with effect from 27th May 2022,” reads the communication.

However, some economists had asked the government to exercise caution before moving to devalue the local currency.

For instance, in a paper titled ‘Is Devaluation an Option for Malawi’s Current Debt Challenges’, economists Thomas Munthali, who is also Director General for the National Planning Commission, and Frank Ngalande felt that, in the country’s case, devaluation can, “at best simply funnel inflation”.

They further argued that, without adequate reserves for essential imports, disaster emanating from run-away inflation—already at 14.7 percent—will be looming.

“In Malawi, make no mistake, the exchange rate, not interest rate, remains the most important determinant of inflation—the central bank knows too well and needs to treat it very carefully always,” the paper reads.

However, Finance Minister Sosten Gwengwe backed the decision to devalue the Kwacha, saying, in the medium to long term, the country would address the problem of forex shortage.

He said it was necessary to do so to correct “a misalignment” that was observed by the IMF.

For Consumers Association of Malawi Executive Director John Kapito, Malawians can only reap the benefits of devaluation if prices of goods and services do not rocket.

“Otherwise, I can see prices of goods rising,” he said.

If his sentiments are anything to go by, then trouble is, like a mysterious cloud, looming over Malawi.

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