The recent 49 percent devaluation of the Malawi kwacha by the Reserve Bank of Malawi (RBM) is not the only key to help the country recover from its economic challenges, the Economics Association of Malawi (Ecama) has said.
Ecama economist Russell Tembo made the argument in Lilongwe at Bunda College of Agriculture, a constituent College of the University of Malawi (Unima) on Thursday evening in his presentation titled â€˜Devaluation of the Malawi kwacha: Its Implications on the Economy,â€™ made to Bunda Economics Students Association.
â€œThis devaluation is not a key, but one of those many keys to help stabilise the economy. In fact, it will just help in accessing ECF [Extended Credit Facility] funds,â€ he argued.
Ecamaâ€™s stance comes at a time when Finance Minister Dr. Ken Lipenga has hinted that the 2012/13 national budget will be a recovery or restorative financial plan involving fiscal tightening in the wake of economic challenges in the country.
Tembo said the weakening of the kwacha will only guarantee the unlocking of donor funds currently being withheld by donors towards the budget.
However, he explained that a full economic recovery will require a package of other measures such as an efficient transport infrastructure and better conditions of doing business in Malawi.
Tembo also said Malawi could recover from the current economic challenges if the energy sector undergoes serious reforms, citing the need for the reviving the suspended grant by the Millennium Challenge Corporation (MCC) which was earmarked for the sector.
He cautioned that it is likely that the recent devaluation will make critical imports such as fertilisers, drug and petroleum products more expensive.
Tembo said such a situation may lead to soaring inflation emanating from goods that use imported raw materials as well as on account of rising cost of transport.
In the short term, he said, there is need for authorities to ensure fiscal discipline to avoid domestically financed deficits.
â€In the longterm, we need diversification of the export base, increased investment to meet domestic demand for consumption and also ensure a reduction of external debt,â€ said Tembo.
On a positive note, he said devaluation will lead to an expansion in the demand for domestic products as people would prefer cheaper local goods.
On his part, Ecama immediate-past president Dr. Thomas Chataghalala Munthali, who gave an inspiration talk to the budding agricultural economists, said the floatation of the kwacha could lead to uncertainty on the macroeconomic front which, he said, may result in a general lack of investment internally and abroad.
During the meeting, Munthali took his time with the students to distinguish between devaluation and depreciation.
He said the former occurs under a fixed exchange rate regime while the latter takes place in a floating exchange rate system which Malawi has adopted.