Malawi’s Economic Recovery Plan (ERP): Short on tangible specifics

Greenwell Matchaya, PhD Feedback to: greenwellmatchaya@yahoo.com Introduction: The current government’s effort to get the economy out of the economic problems at hand are commendable and the effort put in authoring the Economic Recovery Plan have to be celebrated as an indicator that probably someone somewhere out there is contemplating of doing something. Having said that, it ought to be said without fear of contradiction that some, if not most of the plans in the recovery plan do not appear to be founded on any solid economic/development theory or empirics. This response to the economic recovery plan is not exhaustive and must not be interpreted as an attempt to undermine government efforts in its bid to get the economy back on its ‘two’ feet, but purports to point at a number of issues that need clarifications, for the betterment of all of us. The comments below are based partially on the understanding that we are in these problems due to the economy’s failure to generate enough exports (and attract enough FDI) at a time when aggregate demand for imports is skyrocketing due to various reasons. Comments on the ERP: The ERP mentions exchange rate policy as one of the mechanisms the government has chosen to speed up the recovery of the economy. To that end, the government left the exchange rate to the market instead of imposing some control. In other words the government (the central bank) depreciated the Malawi kwacha with an understanding that an overvalued exchange rate stifled exports through reduced external demand for Malawi’s goods and services. Moreover the overvalued exchange rate meant that the government lost a lot of money to the black market leading to increasingly thinner reserves. The only issue with this policy stance is that its efficacy hinges on some knife-edge assumptions. Ideally depreciation may be beneficial if the sum of elasticities of imports and exports is at least one. Put another way, imports suffer too as a result of depreciation and given this year’s emphasis on the farm input subsidy program, one wonders whether depreciation actually won’t lead to a huge forex bill leading to forex shortages. Unless well-planned, a depreciation leads to further depreciations and inflation. This is likely going to be the case especially considering that there is nothing to be done on fuel pricing. Without a subsidy on fuel, every household will see an increase in its wage bill as retailers will try and pass on their fuel-driven high costs to consumers. In any case, one is left wondering how these policies will not get the economy even worse. The recovery plan mentions monetary policy as another tool they are using to get the economy out of its mess. In so doing they have increased interest rates to mop up excess liquidity. The major problem with this policy from my point of view is that an ailing economy needs a good climate for investment. It needs lower interest rates that should encourage investors to borrow money from banks. Such borrowing leads to investment which creates jobs and increases exports in the medium run. Despite the inflationary potential of low interest rates in the short run, one would think investment is what we need and reducing the cost of capital (interest rates) would be among the major ways to achieve that. The ERP falls short of clarifying whether or not they considered this line of thought and why they ignored it. The ERP further considers a social support package aimed at ameliorating the adverse consequences of the ‘corrective’ policies being attempted. Of interest is that the at this crisis time, the government plans to devote energy to increasing multiplication of sweet potato vines, cassava cuttings etc. At this point, one wonders whether the problem at hand is not well understood. For instance, is the issue one of lack of enough cassava cuttings/ sweet potato vines or one of poor adoption of existing and modern technology? Unless this is understood, it may be unlikely that many cassava cuttings would get Malawi out of the economic mess. Clear, mature and honest analysis of the problem is needed as a way forward. Increasing farm subsidy program appears reasonable and popular. But the economic problems we have may in fact be partly to do with huge import demand at constant export values over time. The huge import demand is made even worse by the increasing fertilizer and seed prices overseas given a weak kwacha. So when considering the impact of an increase in farm subsidy on the current economic problems, one has to try and understand why past subsidy programs of 2010 and 2011 did not save us from all these problems. Was the reason anything to do with the insufficiency of the subsidy? Was it to do with prioritization within the program? Was it to do with poor world prices for agricultural goods? Or was it not to blame at all and the issue lied somewhere else e.g. management of the economy? In other words, while the mention of subsidy is possibly good for rural people and all of us in town who enjoy low agricultural prices resulting from overproduction, the ERP falls short on stating how the implied increase in subsidies will change things. The plan further considers scaling up the vitamin A supplementation in schools as a short term economic recovery. Again, in all fairness, it is not clear how this will be financed, how it will lead to economic recovery. Or is it just a safety net? Under Fiscal policy the ERP suggests that a decision was made to prioritize sectors that will generate growth, create employment and boost diversification for the export market for quick forex generation. These sectors are agriculture, fisheries and tourism, but one wonders whether this choice is ad hoc or whether it benefited from some evidence based policy. Again a discussion about what will be done this year in the agricultural, fisheries and tourist sectors that was never done previously and that will be expected to change the status quo ie forex generation is conspicuously absent. There is a mention of advertisement campaigns, but even that discussion is murky and needs clarification. One wonders whether the government is planning to import fishing boats, build many hotels, etc. Even if this was the case, without any mention of the potentials in these sectors that can be harnessed in the short run, one struggles to understand whether we are going to be safe in few months to come. I don’t want to look overly critical of the efforts being taken. For sure since the current government’s ascendance to power some things have changed, but a lot more needs to be done. As a point of departure for this government, it appears that a lot of time has to be devoted to the critical study of the problems at hand in order to formulate policies that can work. At present, and manifested by the contents of the ERP, it is fair to argue that we don’t have a good grasp of the problem at hand. We first need to disintegrate the issues we face by asking and seeking to answer these questions:What is/are the problems Malawi’s economy is facing today? Why do we have these problems? What solutions do we potentially have? Given these potential solutions, which ones appear realistic? What are the risks associated with each option? etc As a nation of people with a diversity of knowledge and experience in various areas, let us make use of those and surmount the problems at hand. Let neither politics nor jealous stand on our way. The strategy is inclusivity. Include as many brains as possible in the bid to map a recovery plan. We either do this or we remain with mediocrity at the peril of the nation. Greenwell C Matchaya, PhD (Economics) ** The author is a former economics researcher/lecturer at the Universities of Leeds (UK) and Reading (UK) and currently an economist and Southern Africa Regional Coordinator for the Regional Strategy Analysis and Knowledge Support System (ReSAKSS-SA)-an Africa-wide network (that supports the CAADP and SADC RISDP implementation) facilitated by the IFPRI and IWMI-SA, but is writing in his personal capacity.