Tuesday, 26 May 2009

Open economic letter to Mutharika on his re-election as Malawi's President

Your Excellency

Congratulations on your election victory – it provides an overwhelming endorsement of what your government has achieved by restoring fiscal discipline and broadly guaranteeing food security through your fertilizer subsidy. On the former I believe you have lessons to share with the US and UK governments, as they head for fiscal deficits of 15% of GDP.

I spent three years working in Malawi as an economist and I am now in grim London making some money as an independent consultant and, probably, over-investing in my human capital. Anyway, I am spending this week in Uganda and as I do so I can not help comparing it with Malawi. I wanted to share some of these thoughts with you.

Despite the global economic crisis, Uganda’s economic prospects are, like Malawi’s, optimistic according to the IMF. The economy is expected to grow at about 7% this year. In the short to medium term Uganda is also expected to start producing oil in commercial quantities, giving the economy a boost larger than the one Malawi is getting this year from Kayelekera. But I wanted to focus on one key difference in economic policy between Uganda and Malawi: exchange rate management. As you can see from the chart below since July last year the Uganda shilling has depreciated by over 30% vis a vis the dollar, while the Malawi kwacha has not moved.

Three benefits worth highlighting if you were to follow Uganda on their flexible approach to exchange rate management:

(1) A weaker currency would support your aim of making Malawi a more competitive exporting nation. Just ask your Chinese friends: for years they have been blamed for artificially depressing their currency to support their export drive. This might be one of the factors behind Uganda’s more diversified export base: coffee, the largest export, accounts for just for 15% of $2.4 billion of exports. In Malawi’s case tobacco accounted for over half of last year’s $1 billion worth of exports.

(2) A weaker kwacha is needed to allow Malawi to build a stronger foreign reserve position. Foreign reserves have been consistently below two months of imports throughout the past five years. This compares to between 5 and 6 months of imports for Uganda.

(3) Finally, tobacco prices are substantially down this year at the auction floors – why not boost farmers’ kwacha proceeds by allowing the currency to depreciate?

And as far as timing is concerned, the best time to do it is NOW because: (1) tobacco farmers would start benefiting immediately; (2) fertilizer and fuel prices have fallen dramatically from last year’s record, so even with a 30% depreciation Malawians should still be able to enjoy lower kwacha prices for these commodities; and (3) by doing it now, the depreciation can still be factored into next year’s budget.

So why not celebrate your victory by setting the kwacha free? And may Malawians be another 30% richer per capita at the end of your next five years.

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