Malawi’s economy and the urgent need for radical structural change
Dr Greenwell C Matchaya
It is a hazy Sunday morning, the neighbourhood is still quite and although I have no intention of going out just yet, part of me is miles away to Africa and the Arab world. On the BBC TV, the mass abuse of human freedoms in Yemen and Syria by the people that are supposed to protect them are conspicuous and disturbing. If only the world and the United Nation System viewed nations and leaderships in the same way, perhaps some variants of no-fly-zones would have been imposed in those countries in a bid to curb the governments’ abuses of human freedoms. Compared to the case of Libya where a no-fly-zone was suggested and subsequently implemented based on the predicted danger that the Libyan government was going to pose in Eastern Libya, the Syrian and Yemen cases are gravely serious especially when we consider that many a person is being killed every day in protest rallies. One would only hope that God and perhaps the international community will do something positive soon.
Selected economic issues at home
Back home in Malawi, a country I love most, progress in terms of infrastructural development is conspicuous and indeed some Malawians are becoming more affluent than ever before. A closer look at the imports and exports data, considered in the context of the recent intermittent foreign exchange and fuel shortages, however reveals another important point about the economy’s ability to sustainably provide economic and social freedoms to all its citizens in the years to come. As I said elsewhere, my examination of the import and export time series data unveils that, not only does the country import more than it exports over time, but also that the gap between imports and exports has been widening and even more so, recently such that a slanted V-shape is markedly visible when the two quantities are mapped on a two dimensional space of value and time.
The increasing differential growth of imports and exports, where imports grow faster implies that the nation’s ability to generate foreign exchange (which it gets when it sells to overseas consumers) lags behind its ability to spend it. Assuming that exports are the major sources of foreign exchange, such a situation inevitably leads to potential foreign exchange shortages. The shortages are even more likely if the growth rate of one of the two departs significantly from its past equilibrium (that is if there is an extra increase in imports growth while exports stay at roughly past growth rates, or when exports stagnate more than before). Of course to the extent that fuel imports depend on foreign currency availability it is not unreasonable to expect a case of fuel shortages in other times of the year depending on aggregate foreign exchange demand.
Of course the data shows that imports have grown considerably more reaching about 2 billion dollars recently, implying that while the asymmetric growth rates in imports and exports is clearly a problem, there is yet another one. The system appears not to be entirely able to make foreign exchange available on the formal market and hence, while the formal system does not have the foreign exchange, the black market has the money. The inability of the domestic formal foreign exchange market to mobilize foreign exchange relates to the price of the kwacha relative to that of other currencies. In the event that the kwacha is given a higher value than its actual market value, many of those holding foreign currency shun the formal foreign exchange market in preference of black markets, which, in those cases are able to offer better prices. Anecdotal evidence reveals that while the bank price of a US dollar was around 150 Malawi kwacha by the middle of May 2011, the dollar was going at closer to 190 Malawi kwacha in other areas at the same time implying an over-valuation of the Malawi Kwacha. It is this differential that repels foreign currency holders from the formal and legal currency market.
Some Options
The import and export revenues I have focused on so far relate to the demand and supply sides of the economy. Drawing from the foregoing discussion, one would say that the supply side of the economy has been growing slowly relative to the demand side. Some of the options are:
(1) Radical changes on the supply side of the economy
The most reliable and effective long term solution is to induce radical structural changes on the supply side of the economy to ensure that the nation is able to generate enough exports that will earn the nation sufficient foreign exchange. Most of the foreign exchange that comes into the nation is accounted for by tobacco earnings whose contribution stands within the neighbourhood of 450 million US$ annually. Although the forecasts for tobacco demand show a future increase in tobacco consumption, important changes are taking place. The major consumers of cigarettes will no longer be the affluent buyers of Western countries but rather developing countries which are predominantly poor and may not pay higher prices.
Developed countries have stepped up their efforts to reduce tobacco consumption owing to increasing incidences of cancers of different kinds among smokers in those countries, and not surprising their aggregate demand is projected to decrease even further. Among the developing countries, China, which has a larger tobacco market, also appears to be set to increase its own domestic production implying that the future tobacco market may be uncertain.
a. Non-traditional crops and associated technology
Policy makers in Malawi therefore need to seriously think about introducing high yielding varieties of non-traditional crops such as soybeans, cowpeas and other oilseed. This is because given the ever increasing prices of crude oil, Western efforts for increasing biodiesel will continue to increase. Moreover as economies of China and India continue to grow together with their livestock industry, their demand for vegetable oils, soybean oilcakes and other crop based feedstuffs are projected to increase.
Although the European sub-region has stepped its own efforts in vegetable oil production from some oilseeds there, their demand outstrips production and hence are projected to be net importers. At present the only major exporters of some of these products are Argentina, Brazil and the United Sates. These are already reaching their peak so that they may not be able to meet any increasing excess demand originating from the emerging economies in Asia.
Malawi needs to acquire technology (including post-harvest technology) in terms of high yielding varieties of those non-traditional crops and wage a campaign for their mass adoption paralleled with helpful extension services. Of course agricultural exports in their raw for suffer from lowering net terms of trade in the long run due to various issues, so value adding is an important factor to consider in any bid to radically transform supply side. As far as soybeans and other oil crops are concerned, the country should consider developing its capacity in crushing so that both soy/groundnut products and seeds are exported. This cushions farmers and the nation from world market price fluctuations. It cannot be over-emphasized that these efforts need to be paralleled with advances in small-scale irrigation to divorce farmers from overdependence on rain-fed agriculture.
b. Mining
While addressing issues of technology and marketing in the agricultural sector are important in the equation, the nation should seriously consider mineral explorations. As I have argued elsewhere before, a quick look at a list of Africa’s successful countries reveals that mineral rich countries account for the bulk of the few well-to-do African countries. Of course there are some resource rich countries that are poor due to mismanagement or foreign intervention, but the proportion of promising resource poor countries is small underscoring the importance of minerals for Africa’s economic development. Botswana, Zimbambwe, RSA, Mozambique etc have all benefited one way or another from mineral endowments. Malawi lies on the Great Rift Valley and has a fair share of little mountains where crude oil and some minerals form. While bearing in mind that minerals can be a curse if mismanaged, I would seriously urge the government to intensify its mineral mapping and exploration efforts, while paying due cognizance of the negative effects, that mining could afflict on the environment of course.
c. Entrepreneurship
For the long term, there must be a deliberate effort to encourage export-oriented entrepreneurship. This could be done not only by government’s taxation policy and other efforts the third sector could also play a vital role. NGOs need to have programs that aim to give their clientele an ability to be part of the exporting community where possible. Education programs should also be tailored to develop entrepreneurial skills in future graduates.
(2) Sensible changes on the demand side
The demand side of the economy needs to be controlled in manners that will not reduce peoples’ welfare. The following can be considered:
a. Import substitution where possible
While it would be unreasonable to try to produce everything, some items that demand foreign exchange constantly are those which could be domestically produced. The government and the private sector needs to do what it takes to intensify efforts to erect plants for sufficient cement and even fertilizer production and ensure that these are available domestically at reasonable prices. These will save foreign exchange. Malawians are building houses everywhere and the resultant demand for cement and other foreign building materials poses pressure on forex. I don’t find it useful to talk about pressure from motor vehicle imports as these have been dealt with in this year’s budget.
b. Local currency payment system
There may be a chance for the nation to save some forex by trading in local currencies with neighbouring countries in limited sectors of the economy. The paper by Matchaya (2010) [ http://www.ecamamw.org/home/publications/Currency%20repatriation%20paper.pdf ], commissioned by ECAMA, highlighted some countries where this is being done. Apart from Zambia and Mozambique, the arrangement between Brazil and Argentina is one of the best that the Malawi government must study if the local payment system is to be implemented successfully. Although such a system may not per se be a panacea, it would ameliorate the forex problem so long it is implemented painstakingly while bearing in mind of the potential difficulties some of which are highlighted in that paper.
c. Exchange rate depreciation
In some cases a monetary solution to easing a country’s foreign exchange position is to depreciate the value of the domestic currency. In the case of Malawi at present where the dollar is trading at a higher price on the black market, the Central Bank can reduce the official price of the Malawi kwacha so that a dollar should start fetching something more than the current MK150. The theoretical positive effects are that such an action would encourage those with foreign currency to trade it on the formal market and that producers could gain because they would face better world prices. Depreciation could also punish the behaviour of imports of luxuries hence could control the growth in import demand. However, this is not without problems. In the first place there is no guarantee that once the currency is depreciated enough dollars will be released on the currency market. It may as well be that people will still go to the black market which will still try to hike its prices. Others may still hoard their dollars as they prospect future depreciations. More importantly, whether depreciation would indeed benefit the exporters which in Malawi’s case are farmers, is not straight forward because, while they may face better prices, farm inputs would become very expensive, and inflation would go up. Very high inflation could not only eat into everyone’s incomes, but could even have a more negative effect unfortunately on those that society ought to protect-the poor. This would discredit those in power and also significantly undermine future production and exports.
It is from this perspective that we see the government’s side pulling in a different direction from that of the IMF and others. While I am aware of the standoff on this issue, I have not come across any study specific to Malawi that seeks to examine the potential impacts of depreciation on the Malawi economy so that we move from this theoretical indeterminacy to some empirical result. I would hence urge the Malawi government to work with the IMF, the World Bank as well as ECAMA and some experts in the field to at the very lease run a study on this. I would be interested in examining the import and exports elasticities in the context of the Marshal-Lerner condition and forge ahead. We need to know those for a starting point.
Since such studies may take long and some funding decisions have to be made now, it would appear to me that some form of compromise in form of a mild depreciation would be necessary and authorities can conduct its effects as we advance into the future.
This is by no means closer to an exhaustive list of what ought to be done. Investment in education, energy, tourism, good governance and rule of law are paramount, but I thought that the areas flagged herein need some more emphasis.
** send any further feedback to greenwellmatchaya@yahoo.com
It is a hazy Sunday morning, the neighbourhood is still quite and although I have no intention of going out just yet, part of me is miles away to Africa and the Arab world. On the BBC TV, the mass abuse of human freedoms in Yemen and Syria by the people that are supposed to protect them are conspicuous and disturbing. If only the world and the United Nation System viewed nations and leaderships in the same way, perhaps some variants of no-fly-zones would have been imposed in those countries in a bid to curb the governments’ abuses of human freedoms. Compared to the case of Libya where a no-fly-zone was suggested and subsequently implemented based on the predicted danger that the Libyan government was going to pose in Eastern Libya, the Syrian and Yemen cases are gravely serious especially when we consider that many a person is being killed every day in protest rallies. One would only hope that God and perhaps the international community will do something positive soon.
Selected economic issues at home
Back home in Malawi, a country I love most, progress in terms of infrastructural development is conspicuous and indeed some Malawians are becoming more affluent than ever before. A closer look at the imports and exports data, considered in the context of the recent intermittent foreign exchange and fuel shortages, however reveals another important point about the economy’s ability to sustainably provide economic and social freedoms to all its citizens in the years to come. As I said elsewhere, my examination of the import and export time series data unveils that, not only does the country import more than it exports over time, but also that the gap between imports and exports has been widening and even more so, recently such that a slanted V-shape is markedly visible when the two quantities are mapped on a two dimensional space of value and time.
The increasing differential growth of imports and exports, where imports grow faster implies that the nation’s ability to generate foreign exchange (which it gets when it sells to overseas consumers) lags behind its ability to spend it. Assuming that exports are the major sources of foreign exchange, such a situation inevitably leads to potential foreign exchange shortages. The shortages are even more likely if the growth rate of one of the two departs significantly from its past equilibrium (that is if there is an extra increase in imports growth while exports stay at roughly past growth rates, or when exports stagnate more than before). Of course to the extent that fuel imports depend on foreign currency availability it is not unreasonable to expect a case of fuel shortages in other times of the year depending on aggregate foreign exchange demand.
Of course the data shows that imports have grown considerably more reaching about 2 billion dollars recently, implying that while the asymmetric growth rates in imports and exports is clearly a problem, there is yet another one. The system appears not to be entirely able to make foreign exchange available on the formal market and hence, while the formal system does not have the foreign exchange, the black market has the money. The inability of the domestic formal foreign exchange market to mobilize foreign exchange relates to the price of the kwacha relative to that of other currencies. In the event that the kwacha is given a higher value than its actual market value, many of those holding foreign currency shun the formal foreign exchange market in preference of black markets, which, in those cases are able to offer better prices. Anecdotal evidence reveals that while the bank price of a US dollar was around 150 Malawi kwacha by the middle of May 2011, the dollar was going at closer to 190 Malawi kwacha in other areas at the same time implying an over-valuation of the Malawi Kwacha. It is this differential that repels foreign currency holders from the formal and legal currency market.
Some Options
The import and export revenues I have focused on so far relate to the demand and supply sides of the economy. Drawing from the foregoing discussion, one would say that the supply side of the economy has been growing slowly relative to the demand side. Some of the options are:
(1) Radical changes on the supply side of the economy
The most reliable and effective long term solution is to induce radical structural changes on the supply side of the economy to ensure that the nation is able to generate enough exports that will earn the nation sufficient foreign exchange. Most of the foreign exchange that comes into the nation is accounted for by tobacco earnings whose contribution stands within the neighbourhood of 450 million US$ annually. Although the forecasts for tobacco demand show a future increase in tobacco consumption, important changes are taking place. The major consumers of cigarettes will no longer be the affluent buyers of Western countries but rather developing countries which are predominantly poor and may not pay higher prices.
Developed countries have stepped up their efforts to reduce tobacco consumption owing to increasing incidences of cancers of different kinds among smokers in those countries, and not surprising their aggregate demand is projected to decrease even further. Among the developing countries, China, which has a larger tobacco market, also appears to be set to increase its own domestic production implying that the future tobacco market may be uncertain.
a. Non-traditional crops and associated technology
Policy makers in Malawi therefore need to seriously think about introducing high yielding varieties of non-traditional crops such as soybeans, cowpeas and other oilseed. This is because given the ever increasing prices of crude oil, Western efforts for increasing biodiesel will continue to increase. Moreover as economies of China and India continue to grow together with their livestock industry, their demand for vegetable oils, soybean oilcakes and other crop based feedstuffs are projected to increase.
Although the European sub-region has stepped its own efforts in vegetable oil production from some oilseeds there, their demand outstrips production and hence are projected to be net importers. At present the only major exporters of some of these products are Argentina, Brazil and the United Sates. These are already reaching their peak so that they may not be able to meet any increasing excess demand originating from the emerging economies in Asia.
Malawi needs to acquire technology (including post-harvest technology) in terms of high yielding varieties of those non-traditional crops and wage a campaign for their mass adoption paralleled with helpful extension services. Of course agricultural exports in their raw for suffer from lowering net terms of trade in the long run due to various issues, so value adding is an important factor to consider in any bid to radically transform supply side. As far as soybeans and other oil crops are concerned, the country should consider developing its capacity in crushing so that both soy/groundnut products and seeds are exported. This cushions farmers and the nation from world market price fluctuations. It cannot be over-emphasized that these efforts need to be paralleled with advances in small-scale irrigation to divorce farmers from overdependence on rain-fed agriculture.
b. Mining
While addressing issues of technology and marketing in the agricultural sector are important in the equation, the nation should seriously consider mineral explorations. As I have argued elsewhere before, a quick look at a list of Africa’s successful countries reveals that mineral rich countries account for the bulk of the few well-to-do African countries. Of course there are some resource rich countries that are poor due to mismanagement or foreign intervention, but the proportion of promising resource poor countries is small underscoring the importance of minerals for Africa’s economic development. Botswana, Zimbambwe, RSA, Mozambique etc have all benefited one way or another from mineral endowments. Malawi lies on the Great Rift Valley and has a fair share of little mountains where crude oil and some minerals form. While bearing in mind that minerals can be a curse if mismanaged, I would seriously urge the government to intensify its mineral mapping and exploration efforts, while paying due cognizance of the negative effects, that mining could afflict on the environment of course.
c. Entrepreneurship
For the long term, there must be a deliberate effort to encourage export-oriented entrepreneurship. This could be done not only by government’s taxation policy and other efforts the third sector could also play a vital role. NGOs need to have programs that aim to give their clientele an ability to be part of the exporting community where possible. Education programs should also be tailored to develop entrepreneurial skills in future graduates.
(2) Sensible changes on the demand side
The demand side of the economy needs to be controlled in manners that will not reduce peoples’ welfare. The following can be considered:
a. Import substitution where possible
While it would be unreasonable to try to produce everything, some items that demand foreign exchange constantly are those which could be domestically produced. The government and the private sector needs to do what it takes to intensify efforts to erect plants for sufficient cement and even fertilizer production and ensure that these are available domestically at reasonable prices. These will save foreign exchange. Malawians are building houses everywhere and the resultant demand for cement and other foreign building materials poses pressure on forex. I don’t find it useful to talk about pressure from motor vehicle imports as these have been dealt with in this year’s budget.
b. Local currency payment system
There may be a chance for the nation to save some forex by trading in local currencies with neighbouring countries in limited sectors of the economy. The paper by Matchaya (2010) [ http://www.ecamamw.org/home/publications/Currency%20repatriation%20paper.pdf ], commissioned by ECAMA, highlighted some countries where this is being done. Apart from Zambia and Mozambique, the arrangement between Brazil and Argentina is one of the best that the Malawi government must study if the local payment system is to be implemented successfully. Although such a system may not per se be a panacea, it would ameliorate the forex problem so long it is implemented painstakingly while bearing in mind of the potential difficulties some of which are highlighted in that paper.
c. Exchange rate depreciation
In some cases a monetary solution to easing a country’s foreign exchange position is to depreciate the value of the domestic currency. In the case of Malawi at present where the dollar is trading at a higher price on the black market, the Central Bank can reduce the official price of the Malawi kwacha so that a dollar should start fetching something more than the current MK150. The theoretical positive effects are that such an action would encourage those with foreign currency to trade it on the formal market and that producers could gain because they would face better world prices. Depreciation could also punish the behaviour of imports of luxuries hence could control the growth in import demand. However, this is not without problems. In the first place there is no guarantee that once the currency is depreciated enough dollars will be released on the currency market. It may as well be that people will still go to the black market which will still try to hike its prices. Others may still hoard their dollars as they prospect future depreciations. More importantly, whether depreciation would indeed benefit the exporters which in Malawi’s case are farmers, is not straight forward because, while they may face better prices, farm inputs would become very expensive, and inflation would go up. Very high inflation could not only eat into everyone’s incomes, but could even have a more negative effect unfortunately on those that society ought to protect-the poor. This would discredit those in power and also significantly undermine future production and exports.
It is from this perspective that we see the government’s side pulling in a different direction from that of the IMF and others. While I am aware of the standoff on this issue, I have not come across any study specific to Malawi that seeks to examine the potential impacts of depreciation on the Malawi economy so that we move from this theoretical indeterminacy to some empirical result. I would hence urge the Malawi government to work with the IMF, the World Bank as well as ECAMA and some experts in the field to at the very lease run a study on this. I would be interested in examining the import and exports elasticities in the context of the Marshal-Lerner condition and forge ahead. We need to know those for a starting point.
Since such studies may take long and some funding decisions have to be made now, it would appear to me that some form of compromise in form of a mild depreciation would be necessary and authorities can conduct its effects as we advance into the future.
This is by no means closer to an exhaustive list of what ought to be done. Investment in education, energy, tourism, good governance and rule of law are paramount, but I thought that the areas flagged herein need some more emphasis.
** send any further feedback to greenwellmatchaya@yahoo.com
the recent develauation news is interesting. ties well with the last paragraphs of this post. mwawerenga?
ReplyDelete