Today we read in the newspaper that the FISP, the lifeline for poor farmers, is under pressure from the depreciation of the kwacha. Clearly, while a little bit of inflation is a good thing (2-4%) too much like we have now is a bad thing. It makes givernment programs and business deals unstable. As with everything in a capitalist economy, the value of the kwacha is set by the law of demand and supply. It works like this:
When you have 1000 bananas and no mango you get enough of eating banana and you would like mango, but you have none. If someone will offer you a mango, you’d be likely to want to give him 100 bananas for just on mango. Here there is a lot of supply of bananas but little supply of mangos, so the price of a mango is high, the price of a banana is low.
On the other hand: if you have 1000 mangos and no banana, you’d be willing to give 100 mangoes for just one banana. With high supply of mangoes and low supply of bananas, the price of a mango goes down, the price of a banana goes up.
The same happens with our currency: if a lot of people want to buy kwacha the price goes up, if a lot of people want to sell kwacha the price goes down.
Why does someone want to buy a kwacha? The answer is: if that person wants to buy something from Malawi which needs to be paid in kwacha. This may be tobacco, tea, or a work of art, anything. ON the other hand: when does someone want to sell kwacha? If that person wants to buy something from abroad which is paid in forex (often US dollars). This can be fuel, drugs, fertilizer or imported toothpicks, again: anything. So if we import a lot the rate of the kwacha goes down, if we export a lot the rate of the kwacha goes up.
A government can try to keep the rate of the currency up artificially, but as we have seen under His Excellency Ngwazi II Professor Doctor Bingu wa Mutharika, this creates shortages of forex, which translates into shortages of pretty much everything from fuel to drugs to fertilizer to sugar. Not a good situation for the country.
In a country like Malawi where very few people are rich, mostly essential goods are imported, only few luxury goods. So limiting import is not easy. It will be possible if we practice import substitution: products which are now imported may be manufactured in Malawi, and we do not need to import them. Even better is: create product for export, and we create a demand for kwacha, which will support the rate. Either way, we have to produce. And their lies the heart of the problem: we do not produce enough. We need to become more productive, to keep the rate of the kwacha stable.
There are many reasons for low productivity in Malawi: joblessness, inefficient agricultural and production practices, and above all: a bad business climate. This is the responsibility of the government, and it is not doing very well in that regard. We will look into that another time.