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The beauty of stability: Malawi kwacha

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The fact that the Malawi kwacha exchange rate to the United Stated dollar has remained relatively stronger has created some controversy in Malawi. There are those who do not think it is possible and, therefore, argue that the exchange rate is being manipulated for political expediency. Then there are others who believe that this is a result of some economic fundamentals holding firm. It is my belief that the kwacha’s ability to maintain its value has been a good thing for the country.

Remember that every time the kwacha loses its value against the dollar, prices of goods go up across the board. This is because the country does not produce enough. For example, if an item costs $1r when the kwacha is at K700 to the dollar, this product will sell in Malawi for K700. Immediately the kwacha loses its value, say to K750 to the dollar, the price of such an item in Malawi kwacha increases to K750 even though its dollar price has not changed.

In addition, the exchange rate has an impact on the critical indices such as inflation, interest rate, fuel prices and national debt and job creation. Therefore, stability of the kwacha against the dollar has been one of the reasons why fuel prices have not gone up for over a year now. The other important thing to note is that the country has been borrowing from abroad for various reasons. These external loans, as well as their servicing, are normally in foreign currency. So, if the government owes some foreign entity $1 million, it will pay an equivalent of K730 million if the exchange rate is at MK730 to the dollar. Since the government’s budget is in dollars and the servicing of such loans comes from domestic resources, which are collected in Malawi kwacha, the national account will record K730 million. Suppose the kwacha then devalues to K800 per dollar, Malawi’s national accounts will record the same loan as K800 million. In the national accounts in Malawi kwacha, this will mean an increase in the loan amount recorded despite the fact that the nation has not borrowed any additional funds.

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Furthermore, since external loans are denominated in foreign currency, the repayments of such loans are determined in foreign currency as well. Take the case where the county is repaying an amount of $100 per month in principal repayments and interest, this would equate to K73,000 at the exchange rate stated above. A loss of value to the Malawi kwacha to K800 to the dollar immediately increases the value of the repayments to K80,000 per month. The net effect of this on the budget is that, suddenly, the Malawi government would have to find additional resources to allocate to the repayments and interest. Where does this money come from? The taxes that you and I pay. It is not inconceivable that a weak kwacha can, therefore, lead to increased tax rates if the government would require additional resources to offset the additional domestic currency due to the exchange rate changes.

This could also be the explanations for the historical evidence that clearly confirms that the trajectory of deepening poverty in Malawi correlates loyally with Malawi kwacha depreciation from stronger than 1:1 in the 70s and early 80s to current rate of about K730:$1. In practice, a much stronger kwacha should yield more benefits to Malawi’s economy, and halt deepening poverty. Conversely, any kwacha depreciation will further fuel inflation, deepen poverty and widen the already huge gap between the rich few and poor masses.

A stable Malawi kwacha has a positive impact on inflation and interest rates. Thus, with a stronger kwacha, the Reserve Bank of Malawi (RBM) will never be forced, by the fear of inflation, to knowingly sustain disruptively high Monetary Policy Rates (MPR) that will, in turn, trigger over 30 percent cost of borrowing to real sector investors. This is one of the reasons for the lowering on the MPR by RBM which makes the cost of borrowing cheaper. Cheaper interest rates can lead to a more sustainable Buy Malawian since Made-in- Malawi goods will become more competitive against imports. Thus, a stronger kwacha will stimulate productivity, with cheaper Made-in-Malawi goods.

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