Tuesday, May 8, 2012

Strong kwacha will not deter rise in prices

Official data from the National Statistical Office (NSO) shows that inflation has hit double digits in January 2012 to 10.3% from 9.8% in December 2011 . Non-food inflation even went further to 14.9% in January 2012 from 14.4% in December 2011 on a year to year basis. The Center for Social Concern, a catholic linked NGO, also reported a rise in cost of living, especially in the four main urban centres. Authorities contend an overvalued Malawi kwacha is necessary, and argue against a devaluation on the basis that it will hurt the over-taxed poor people through high prices. I disagree, simply because prices are still rising and the low wages, for the few that have a paid job, are very much static. How much do you pay for sugar, bus fare, fuel, cooking oil and bread now compared to same period last year? Would a strong kwacha really contain inflation? Recently chiefs have been paraded in public to support the government’s premise that a devaluation will hurt poor Malawians. I assume the poor in this country can be easily identified because most of us barely survive. Job or not. Its effect is a rise in prices, so goes the argument to justify the strong kwacha. One question we should all ask is: why are prices rising when the kwacha remains “very strong” against all major trading currencies ? A weak Malawi kwacha easily buys US dollars or South African Rands on the street. The stronger Malawi kwacha fails to do so in our commercial banks. Which Malawi kwacha is real in this case or trust-worthy in terms of value? I leave it to you. We know that businesses have continuously adjusted their prices in light of high inflation amid doubts over official numbers, a common trend by businesses everywhere in the world. It appears a “strong” or “artificially strong” currency does not guarantee low inflation rates, and the devaluation fallacy should be re-looked, the economics corrected and the average person told the truth. At least, this is a reality in our “God fearing” Malawi.Take a case of a policy with any of the insurance companies. The upward adjustments in premiums due to inflation are being felt by individuals and businesses, thereby adding to more hardships. While insurance premiums might considered a “domain of the rich” think of the wrangles going on between minibus operators, insurance and the jitters it sends with possible fare hikes. Minibus owners fights with insurance companies is indeed classic example of high inflation at the moment minus the usual insurance risk. And then if you are junk of online chats such as “facebook”, it is clear people are wondering why prices of certain products are rising over fifty percent or even doubling. The price of a 5 litre Kazinga cooking oil now costs MK2500, from MK1300 a year ago. This is all happening when the Malawi Kwacha is still very “strong” and authorities want to maintain the status quo for the sake of “not hurting the poor with high prices”. But prices are rising and the supposedly poor people being protected by the anti- devaluation are feeling the pinch. Factor in a heap of taxes that Malawians are paying. What do you get? We all cannot turn to religion and expect divine solutions. Someone must take responsibility and leadership to deal with the worsening economic situation.So why not devalue the Malawi Kwacha? At least we are already living a reality of high prices. The earlier, the better. If the fear of high prices is real, the government of Malawi through its regulatory authorities such as the Reserve Bank of Malawi must make it easier for businesses or individuals to easily access foreign exchange and remove the “war type” exchange controls. Alliance Capital Limited in its lastly weekly money market commentary for February 2012 notes that the parallel market has blossomed to the extent that many companies are using it and I quote “It is no wonder that, unofficially, every company/business is frantically trying to access forex by any means, legal or otherwise, even at exorbitant rates way above the official rates simply to avert what maybe be catastrophic conditions”. This observation is real and confirms the reality: a high Malawi kwacha will not stop prices from rising as businesses are already paying almost twice the official rates to access foreign exchange to procure inputs. If you factor in taxes and transportation costs, one can easily understand why prices are going up. Why not devalue then?Do businesses or investors trust the Malawi kwacha? Kind of a difficult question to answer but you can judge for yourself. On short-term, possibly yes. Some sort of anecdotal evidence that the kwacha has not come close to the “once mighty Zim dollar”. But I have strong reservations on the long-term if current events are anything to go by. Investors are not taking a long-term view of our Malawi kwacha until issues of overvaluation are courageously addressed by authorities. For instance, Treasury bills, a short term instrument, on February 23, 2012 were oversubscribed by MK8billion. Authorities were only looking for MK1.23billion. On the other hand, the authorities have not been able to raise enough money through issuing long-term instruments despite higher rates. Why is this so? It could be a pointer that everyone is taking a short-term view of investing in Malawi kwacha instruments. Not a very good scenario for business confidence. Recently Ethiopian airlines announced that they no longer accept bookings in Malawi kwacha citing the tough exchange controls in Malawi and the consequent inability to remit their proceeds to Addis Ababa. They have accordingly reduced their flights or intend to do so. Whatever the reasons, both scenarios in my opinion reflect an increasingly loss of confidence in the Malawi Kwacha as a trading currency. The high market premiums on the street tell a clear story. Why authorities cannot act decisively is amazing. Nonetheless prices are rising and the strong Malawi kwacha, coupled with exchange controls is bringing a lot of inflationary pressures. At the same-time “informal street banks” dealing in forex are fast becoming a norm albeit with higher rates, but fortunately market determined. In short, I hold the opinion, that attempts to mobilize chiefs and other pundits to argue a case against devaluation on the premise of expected high prices is not only flawed but ill-informed. Prices are rising at much faster rate because a sizeable number of imports are being financed by forex obtained from the street. The street rates reflect the true value of the Malawi Kwacha. Clinging to a strong kwacha is not stopping a rise in prices. If you disagree, how much more do you pay for your loaf of bread now than a year ago?

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