By Dumbani Mzale, contributor:
There has been a flurry of economic events during the post-devaluation era, necessitating a thoughtful approach to comprehend and analyse such phenomena.
On November 9, 2023, the Reserve Bank of Malawi (RBM) devalued the local currency by 44 percent in what experts described as a well-calculated move to align it with other international currencies.
Malawi Confederation of Chambers of Commerce and Industry president Lekani Katandula said the decision to devalue the Kwacha was tough but necessary.
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Katandula said it might translate to higher prices for some goods, especially those with an import element, which might be tough for Malawians, but that it was better than running out of key goods like fuel and medicines.
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“On the positive side, this should meet one of the key conditions for the International Monetary Fund (IMF)’s Extended Credit Facility (ECF) and if that comes through, then we should have improved forex supply soon. It will also encourage exports whilst discouraging unnecessary imports,” Katandula said.
In a separate interview, Malawi University of Business and Applied Sciences-based economist Betchani Tchereni said despite the increase in prices that would follow, the decision assured of macro-economic stability.
“It is a necessary evil. Macroeconomic stability is very important for economic growth. This is going to help bring that stability.
“Of course, people are going to be hurt, prices are going to rise, but this will help clear the market as the official rate has come close to that on the black market,” Tchereni said.
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In the aftermath of the Kwacha fall, RBM Governor Wilson Banda asserted that the devaluation was a strategic move to address supply-demand imbalances in the currency market.
Prior to the devaluation, the Kwacha had been considered overvalued, causing misalignment in the market. This misalignment made exports expensive from an international trade perspective while rendering imports more affordable.
Consequently, this imbalance led to an insatiable appetite for foreign-made products, draining foreign exchange reserves and increasing pressure on the price of a unit of foreign currency.
Currently, Malawians are consuming a substantial $250 million per month in a small economy valued at around $12 billion.
To put this in perspective, just two years ago, the monthly consumption was $209 million, and by May 2015, it stood at $191 million.
Post-devaluation developments show a positive trend in the macroeconomic landscape. Two months after the 44 percent devaluation, the economic speedometer seems to tilt more towards positives than negatives.
Macroeconomics, distinct from microeconomics, focuses on the aggregated economy, while microeconomics delves into issues affecting individuals and companies.
Immediately following the Kwacha devaluation, the government, led by President Lazarus Chakwera, successfully regained the ECF, which is expected to run for the next four years.
The currency alignment is part of a broader economic reform package pursued by the Malawi government to restore donor confidence, including the IMF.
The new ECF, valued at about $174 million, aims to strengthen Malawi’s Balance of Payments, recording transactions between Malawi and the rest of the world.
The “signalling effect” associated with the IMF’s ECF encourages official donors to support countries under the programme. Malawi has already received $80 million in direct budget support from the World Bank.
Finance Minister Simplex Chithyola-Banda highlighted that the ECF is set to unlock $240 million worth of foreign exchange into the economy.
Additionally, the World Bank approved a $137 million direct budget support package for Malawi, marking the first kind of such support since 2017.
Cumulatively, government has secured over $457 million in grants and loans from multilateral and bilateral donors over four years.
Development partners commend the administration for addressing macroeconomic imbalances, unsustainable debt and long-standing structural constraints inhibiting private sector-led growth.
The steps taken by Malawi’s authorities have garnered praise from traditional development partners, including the World Bank, for stabilising the macro-economic crisis.
Development assistance in the form of direct budget support plays a crucial role in Malawi’s financing, particularly after poor public finance management in 2013 led to the suspension of such support.
Government’s efforts to reverse the trend of aid channelling through international non-governmental organisations, a practice adopted after the Cashgate scandal in 2013, are noteworthy.
Economic experts such as Exley Silumbu and Dalitso Kubalasa anticipate that Malawi is on the right economic trajectory.
They expect the IMF programme to attract more Foreign Direct Investment and increase inflows for the country in the future.
