Wednesday, 9 December 2009

Carta abierta al presidente de Malawi

Your excellency

I first wrote to you congratulating you on your re-election seven months ago. Today I attended a book launch that inspired me to write to you again. The book is a detailed account of the economic reforms that have resulted in unprecedented growth and poverty reduction in Uganda since 1990.

What were the two key reforms of the early 1990s that kick started Uganda's boom? One of them, you might have guessed, was establishing fiscal control. As Alan Whitworth (one of the authors of the book) has written elsewhere, your Government also did this successfully during your first term in office. You have been widely congratulated and have reaped the benefits of this achievement.

The second critical reform of the early 1990s was the liberalisation of the exchange rate. The practical way of doing this was by legalizing the parallel market exchange rate. 'The results included a rapid expansion in non-coffee exports [a five-fold increase in four years!]; easier current transfers; and reduced rationing in imported consumer goods.' (p. 55).

Emmanuel Tumusiime-Mutebile, the current Governor of the Bank of Uganda and another of the book's authors, said during the launch:

"with the fixed exchange rate coffee farmers were GROSSLY cheated by the government. Also, as demonstrated by Uganda's experience over the last 18 months a flexible exchange rate makes adjustment to external shocks much less painful."

I reproduce again the chart showing the dramatic depreciation of the Uganda Shilling compared to the Malawi Kwacha following the financial crisis in September last year. You will be interested to know that despite of (or because of) the depreciation Uganda is expected by the IMF to have grown at 7% in 2009 and to grow at 6% in 2010 - that compares favourably to Malawi's growth rates of 5.9% and 4.6% for those two years.

In conclusion, I am afraid that the solution to the forex shortage is not to get Perks the Governor to tell people not to buy luxuries this Christmas (as reported in the article below). It is for Malawi to liberalise its exchange rate as Uganda did, to its significant benefit, 19 years ago. Until that happens the gains achieved during your first term will not be consolidated.

And if they are not consolidated your second term could be as poor as Acheya's. You will be remembered as the president who established fiscal discipline and a huge fertilizer subsidy. Acheya is the president that introduced universal primary education and allowed poor farmers (and not only well-connected estate owners) to grow tobacco. For the time being I still prefer Acheya's legacy, but you still have time to do better than him.

God bless Malawi.


  1. I am always surprised, Bernabe, how a clever person such as yourself can spend so much of his time on meaningless statistics. Do you think Malawians are going to be much concerned by an economic growth rate that happens -- perhaps -- to be 1% behind Uganda's and are going to overwhelm their government with demands for a devaluation of the kwacha on that basis? The recent fuel-supply crisis may be more on their minds.

  2. Anonymous,

    Thank you for your comment. I cannot quite tell from it whether you agree with me or not - but I am sorry that you don't find these stats as fun as I do.

    In any case I think you misunderstand the point of quoting this and next year's GDP growth rates: it was merely to show that a huge depreciation does NOT have a negative impact on the domestic economy.

    The case FOR a flexible exchange rate is made without any recourse to stats here:

    (1) I quote the Governor of the BoU as saying that with a fixed rate the government was GROSSLY cheating coffee farmers. The same could be said about Malawi's tobacco farmers.

    (2) Non-coffee exports in Uganda boomed.

    (3)Rationing of imports stopped being an issue.

    and (4) it has underpinned 20 years of 7% growth and huge poverty reduction in Uganda - this is not about a difference in a stat for one year. It's about the track record.

    As you say maybe I could have made point (3) a little more colourful by mentioning the rationing of fuel.

    In any case sorry to disappoint you on your expectations.

  3. You are damn right, the President has been fighting against devaluation of the kwacha for the last five years and the result; failure to pay fuel suppliers, forex shortages and ofcourse hurt tobacco farmers in the process. Is it true that our economy will really grow at 7.7 percent and not 6.3 percent which was earlier announced? What do you think

  4. just to through a caveat on these basic economic discussions that the theory of exchange rate management recommends depreciation or devaluation of the national currency - simply because the analysis is a theoretical construct that is based on a number of assumptions. Devaluation is not a penacea fro economic growth but its symptom that foundmental factors are not working properly in the economic system. Please do not be too simplistic in your discussion.

  5. I am Anonymous No 1 (not any of the other excellent anonymi)I appreciated your courteous response to me, but let me explain my frustration a bit more clearly.Your exchange-rate graphs irrefutably show that Malawi's fixed rate is a fixed rate (a horizontal line)and Uganda's variable rate is a variable rate (a line that goes up and down). I think I could live without such graphs.
    This month, the IMF Big Bwana and the USAID Big Bwana flew into Malawi and declared that all's well in Malawi (more or less) and that the aid flood can be let loose once again by all those western donors who are itching to dump their aid dollars. No doubt they were brandishing statistics such as your own.
    Maybe they could have looked around a bit and seen some hungry people in the Shire Valley being fed by the WFP (four consecutive maize "surpluses" notwithstanding)and talked with people who question Bingu's private jet- purchase and his groteque private palace in Thyolo when Malawi's forex bureaus are dry.
    But they are busy men with a lot of dollars to dispose of.
    Perhaps we, less-busy mortals, should be a little more questioning of statistics?

  6. Kwacha ! Kwacha ! Kwacha !