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Banda Devalues the Kwacha: When Needs Must?

While many hope a weakened Kwacha will help Malawi's economy recover, rising prices are causing suffering .
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President Joyce Banda of Malawi.

Blantyre, Malawi:

President Joyce Banda has put Malawi in donors’ good books by devaluing  the local currency, the Kwacha.

Her late predecessor, Bingu wa Mutharika, had long rejected calls from the International Monetary Fund (IMF) to do so, which had led donors to withdraw programmes and support. Now, Malawi’s international partners are returning with renewed vigour, but not all Malawians necessarily see the devaluation as being in their best interests.

Mutharika’s resistance

In June 2011, Mutharika’s sustained refusal to adopt IMF recommendations led the international organisation to officially declare its Extended Credit Facility (ECF) programme off-track. As a result, the country’s development partners withheld over $500 million in budgetary support.

About 40% of Malawi’s national budget depends on donor money and the sudden loss of foreign aid led to an acute shortage of foreign exchange, making it difficult to import much-needed fuel and drugs.

When Joyce Banda assumed power after Mutharika’s death in April then, the economy was top of her priorities and, in a bid resuscitate it, she devalued Malawi’s currency by almost 50% against the US dollar.

Returning friends

Announcing the devaluation, Reserve Bank of Malawi Governor Charles Chuka said the decision was made in a bid to help the country’s heavily depleted foreign exchange reserves. “The devaluation we have done was really inevitable” he said. “We have been sitting on this for many years, running out of the reserves, which resulted in some of the things you have seen on the market; we couldn’t even import petrol. What we have done really helps the country to retain the IMF programme, to allow donors to come back to support us”.

Indeed, Malawi’s donors have been returning in droves. Following the devaluation, the IMF announced its intention to start a new programme to replace the three-year ECF, which was frozen last year and expired in February 2012. The World Bank promised to collaborate with the IMF mission on a rapid response operation to provide technical support to the 2012/13 budget and vowed to finance community-focused projects such as the Malawi Social Action Fund, the Local Development Fund and the Irrigation, Rural Livelihood and Development fund.

Banda’s move also managed to persuade the UK to resume full diplomatic relations with the country and has raised hopes that the $19 million budgetary support Britain used to contribute will be resumed. The two countries had a diplomatic spat a year ago when Mutharika expelled the UK’s High Commissioner after the British official was quoted in a leaked cable saying the president could not tolerate criticism. The UK responded in kind. To patch up relations therefore the newly inaugurated Banda quickly dispatched a new High Commissioner to Britain. And, earlier this month, the British government gave Malawi a total of £30 million ($48 million) to help stabilise the country’s economy and buy medical supplies.

The head of the African Development Bank Donald Kaberuka has also come out saying he is willing to provide $45 million in budget financing to help revive Malawi’s struggling economy. “Now that they are having very constructive discussions with the IMF,” he said, “I am prepared absolutely to support Malawi as they resume the reforms, which were doing so well some time ago. I am confident Malawians are doing the right thing and we want to support them.”

The good with the bad

The response by Malawians themselves, however, has been mixed. A weakened currency has been particularly good for exporters such as tobacco farmers who sell predominantly to foreign firms for US dollars. Julian Chidumu from the Tobacco Control Commission, for example, said: “we are very happy [with the devaluation] because the [tobacco] prices are good on the market…and we have seen already the prices are actually picking up which is very good for the famers.”

Importers, however, have tended to suffer and, with inflation rocketing, the prices of goods and services have also significantly risen. According to John Kapito, executive director of the consumer rights lobby group the Consumers Association of Malawi, the rise from inflation has also been compounded by a disproportionate increase in prices by the traders. “We have seen that some traders have indeed adjusted the prices within some margins that are not acceptable,” he explained.

Luther Mambala, president of Malawi’s Congress of Trade Union, an umbrella body of Malawi’s trade unions, argues that the devaluation will have a particularly significant impact on the low-income earners. “We are now planning to engage into negotiations with the government which is the biggest employer in Malawi to consider increasing salaries of the workers to match with the recent prices for goods and services,” he explained.

Mambala also believes the devaluation could have waited until the passing of the national budget, but Chuka insists that this was not possible. “It is a big sacrifice to every household in the country because its impact is going to be huge, but we had to do it," he said.

Leader of opposition in parliament, John Tembo, concurred, in saying that the floating of the kwacha was unavoidable. “I cannot be happy about devaluation, but factors and options available justify this. What is the alternative if we don’t devalue?" he asked.

Economist Dalitso Kubalasa, executive director of the think-tank Malawi Economic Justice Network, echoed this sentiment, adding that the devaluation has been long overdue. “Of course effects will be very biting, but it is good we have made a decision rather than delaying."

Many Malawians will no doubt suffer from the devaluation in the short-term, but many see the move as being in the country’s long-term interests – indeed, the IMF suggests that, even with Banda's swift moves to resuscitate the economy, it will take at least one year for Malawi to recover from the economic legacy left by Mutharika.

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