How Kwacha depreciation affects your finances

In the past couple of months, given the recent depreciation of the Malawi Kwacha, I have had followers of my column asking me to explain what the difference between depreciation and devaluation is and how the two affect personal finances.

For a while, I have been dodging this subject because I have been considering it as somehow technical for most Malawians. But then my child came home last week laughing and said: “Dad, my teacher wanted to buy my money with money; can you believe it?” Apparently, he had accidentally carried a one dollar note in his bag and his teacher jokingly asked if he could give him Malawi Kwachas for it.

When my son was telling me this, there were some cousins who sided with the boy “Aaah! Ndalama nazo zikugulana mwawanthu? Can one buy money?”  But yes, money is sold and bought like any other commodity and there are businesses that just specialise in this trade. United Kingdom thrives on this and stopped concentrating on merchandise exports long time ago.

Back to our subject, devaluation would be a deliberate decision by government to reduce the value of the Kwacha against the US dollar or other foreign currency while depreciation is loss of value of the Kwacha against foreign currency such as the dollar due market forces (that is to say too much Kwachas chasing a few dollars).

To put it more contextually, if Oweherya is in the business of buying cars from Japan and selling them in Malawi, he will need Japanese money (or a currency that is universally accepted like the US dollars). So, he will have to first change his Malawi Kwacha money into US dollars. In other words, he has to buy US dollars first because Japan will not accept Malawi Kwachas.

Few months ago, you needed K350 to buy one US dollar. If Chitemwa wishes to buy a car in Japan priced at $2 000, then he will need an equivalent of K700 000 (K350 multiplied by $2 000) for the bank to give him the $2 000. But as it now stands, US$1 is exchanging for K450 each. Meaning, you presently need K900 000 (K450 multiply by $2 000) to buy your car in Japan. So, for the bank to give Chitemwa the same $2 000, he will need K900 000 this time.

The first effect of devaluation, therefore, is causing imports to be expensive. But why would government ever wish to effect devaluation if it causes import prices to be so high and even cause inflation? While this is a straight forward and valid question, the answers can be slightly complex and depend on the economy context. Put simply, devaluation would normally occur when there are few dollars in the country.

So in a bid to encourage more dollars to flow into the economy, government can effect a devaluation to incentivize exporters as well as encourage those hoarding dollars to sell them. This would bring more dollars into the banks which we so much need for various imports. Depreciation is something largely beyond government control as it depends on the amount of dollars in the country. In the present case, it’s because donors have been withholding their dollars due to the cashgate scandal; hence, the loss of value by the Malawi Kwacha as there are lots of Kwachas in circulation chasing a few dollars.

But what are the effects of a devaluation or depreciation on your incomes? The effects are the same. Let us think about a farmer, Bulabula, who grows and sells tobacco. If he sold his tobacco at $1 per kilogramme last year, then he got K350 per kilogramme (assuming $1 was exchanging at K350 each).

Now, with the currency losing value from K350 to K450, Bulabula will be getting K450 per kilogramme. So the farmer, Bulabula, is getting more Kwachas even though the value in dollar terms is the same. The depreciation is helping the farmer to earn more. This will motivate Bulabula and other friends who did not grow tobacco this season to grow more tobacco next season.

The second effect of depreciation, therefore, is boosting income for exporters and incentivising them to export more. This would subsequently bring in more dollars into the country.

However, whether Bulabula could reap the full benefits of the depreciation could partially depend on whether he buys local or imported goods.  This is because imported materials, such as Chitemwa’s car, will now have become expensive due to the depreciation and importers are likely to increase prices of their imported goods. Assuming that most of the goods in a country are imported, then there could be imported inflation (i.e. a sustained rise in the price of goods and services as importers have paid a higher price which they likely pass to their customers – and they also know that exporters have more money).

Having already been battered by general January, have a blessed weekend as you plan at spending wisely the remaining but value-losing Kwachas!

Cut The Chuff