The carrot and the donkey: Of Malawi and devaluation

The recent devaluation by the Malawi Government has once again demonstrated our short sightedness as a nation.

For many years we have been trying to solve long term problems by using short term solutions. These short term solutions however always end up offsetting the intended long term benefits. As a result we find ourselves in a vicious cycle. Reaching for but never reaching.

One is tempted to compare our nation to a donkey that is tricked by its rider with a carrot, by dangling it in front. The donkey in its stupidity and greed thinks it will reach the carrot. Its greed blinds it to the fact that it is being manipulated into performing acts of labour.

Malawi was fooled by promises of being showered with donor aid and loans by the international community.

The International Monetary Fund(IMF) as standard procedure, states that in order to provide funds to an economy, the economy must get into a position to start repaying as quickly as possible.

The IMF believes this is achieved through the country reducing its balance of payments position. The receiving country therefore needs to reduce the demand for goods and services by taking necessary action(eg by increasing taxes and cutting government spending) and in our case through devaluation.

With these steps it is expected that in the short term standards of living will fall and unemployment will rise. These negative effects are however considered short term until the balance of payments position improves.

So while one has to appreciate the benefits of devaulation, such as the immediate availability of FOREX, meaning our businesses can easily trade again, one has to question our long term position and wether what was the root cause of the problem that brought us to this point has been permanently solved.

The root cause of our problem is that Malawi has been in a balance of payments deficit position for a long time, importing more than it exports.

Devaluation now only means that exports are now cheaper and our imports more expensive. This will further worsen our balance of payments position and lead to more borrowing and hence the need for more devaulation.

The money we receive only serves to provide capital so we can produce raw materials to sell to our providers of capital, until they sell us finished products at prices that will make one wince.

Malawi therefore needs to find itself in a position where it is exporting more than it imports and the rest will follow.

Unless Malawi becomes a producer economy, capable of producing to sustain its own needs and those of others, it will forever be stuck in this tragic dance of comedy.

Devaluation is therefore not the solution, but the carrot and Malawi is just a donkey.