Devaluation refers to the lowering of the value of a countryâ€™s currency relative to other currencies. Briefly, devaluation makes a countryâ€™s exports relatively less expensive while making imported products relatively more expensive for domestic consumers.
Devaluation, much-talked about but dreaded in several quarters. It is probably President Joyce Bandaâ€™s boldest decision since rising to the presidency on April 7 2012 in line with constitutional order after the death of then president Bingu wa Mutharika (may his soul rest in eternal peace). For the record, the late Mutharika resisted calls to adjust its value, saying doing so would hurt the poor as prices of goods would likely skyrocket.
However, many economists argued that devaluation was the way to go if the country were to unlock frozen aid and halt a downward spiral in the economy.
Due to low foreign exchange reserves owing to frozen donor aid and poor prices fetched by tobacco, the major forex earner accounting for 60 percent of foreign currency earnings, Malawi has for the past three years struggled to import fuel, drugs and other essential items not manufactured locally. Queues became the order of the day. People queued for fuel, for forex, for fertiliser and, more recently, for sugar.
So, what next after the devaluation? Well, there is no denying the economy will experience some negative effects. Prices of some goods and services such as pay television and, in some cases, phone rates have already gone up. Fuel pump prices will also likely go up as the commodity is purchased in dollars. But, at the end of the day, it is a positive devaluation.
Like I said the other day, to get well, many times, one needs to endure swallowing bitter pills. Devaluation is one such bitter pill we need to swallow if the economy is to get back on track. In fact, we needed the devaluation yesterday! It should have been effected three years ago! Even former Finance minister Goodall Gondwe agreed this week the devaluation was long overdue!
Most importantly, the devaluation, together with the liberalisation of foreign exchange market, is expected to contribute to governmentâ€™s efforts to reach early agreement with the International Monetary Fund (IMF) to unlock donor flows in the next few months.
It is my hope and prayer that sanity will prevail, especially among the business community. This ought to be the case because most of the prices consumers are paying for commodities today are, to put it lightly, “devaluation prices” as the companies bought dollars at K300 and above to import raw materials.
Devaluation is real. Letâ€™s keep our fingers crossed as we face our realities.