Aug
24
2022

Understanding the Impact of the Devalued Kwacha

Start time 11:30 (UK) / 12:30 (Malawi) Location Zoom

On the 27th May, the Federal Reserve Bank of Malawi announced a return to a market-determined foreign exchange rate regime to support dwindling foreign currency reserves. The move came in reaction to rising commodity prices which have hit Malawi hard, amid declining revenue from tobacco, its major export. In essence, the Kwacha was devalued against the dollar by around 25% (read our reporting from the time).

On Wednesday 24th August 2022 the SMP hosted a digital discussion event exploring the impact of the devaluation, three months on.

Objectives:

The event had three objectives:

  • To understand the contemporary context in Malawi: the human and economic implications of the devaluation, combined with other cost of living pressures (fast rising inflation, the impact of the Ukraine war, etc).
  • To listen to analysis about how the situation might evolve from here, with a particular focus on medium-term food security.
  • To offer insight and advice for members in Scotland to support partners in Malawi and identify clear actions we can take as a network and a community to offer meaningful support.

Watch the full meeting on this webpage or click the below link to watch individual speakers.

Download the chatbox dialogue (where there was an excellent Q&A).

Speakers:

The meeting heard from:

Summary briefing

Below is a summary of the key points made by speakers:

There was strong consensus across all speakers as to the very significant human and economic impact of the devaluation and concern that a further devaluation in the coming months may worsen the situation.

Malawi has a significant trade deficit, of around $700m: it imports more than it exports. This has resulted in a shortage of foreign exchange and the overvaluing of the Kwacha. The devaluation was widely seen by the international community as a difficult but necessary step to kick-start the Malawian economy, we understand it was very much encouraged by international finance institutions.

While the devaluation has had some economic success, it has not succeeded in ending black market currency trading and some believe the kwacha is still 15% overvalued, leading to speculation of a further devaluation.

The devaluation, combined with global supply system issues, the fall-out from the war in Ukraine and Storm Ana in Malawi, has had a very damaging impact in Malawi, significantly increasing the cost of living:

  • Inflation has risen from 12% to 25%.
  • Interest rates have risen and SMEs (which make up the overwhelming majority of the Malawian economy) are struggling to access affordable credit.
  • Diaspora communities are not remitting money through the formal economy at the same level.
  • The cost of food has increased very significantly (100-150%).
  • There are reports rent and accommodation has also increased 25-75%.
  • There are real concerns for job security.
  • As financial pressures rise there are reports of increasing petit theft and opportunistic crime.
  • Clinics are struggling to procure the necessary drugs and medication, with costs increasing.
  • Petrol and Diesel now costs broadly the same as in the UK, this impacts almost all parts of the Malawian economy.
  • Perhaps most worryingly, fertiliser has increased from MK15,000 to MK75,000 in recent years: a five-fold increase. c75% of Malawians are subsidence farmers, reliant on fertiliser for sufficient yield to feed their families. A great many Malawians will not be able to afford fertiliser when it comes to planting season in a few months. This will likely have significant impact on food security February – April.

Comparing the Scottish and Malawian contexts

The UK, and most of the world, is experiencing similar cost of living challenges as energy prices rise. There is poverty, inequality and suffering in both Malawi and Scotland.

However, it is important to note the fundamental difference between our two contexts, not least our respective economic and social starting points. GNI per capita, per day, is £82 in the UK; it was £1.31 in Malawi before the devaluation. There are 400 people per doctor in the UK; in Malawi it is 40,000. The Scottish health budget is about £4,000 per person, per year; in Malawi it is about £10.

What can the SMP do?

While arguably the largest cross community international development network by member numbers, the SMP is a small charity with modest capability to affect macro-economic matters. However, we believe everyone can do something. Here are six tangible things we identified in the meeting, from listening to Malawi, which the SMP will do to support our friends and partners in Malawi, through solidarity and dignified partnership:

  1. Continue to share information and updates with members in Scotland, ensuring SMP members are aware of the real pressures in Malawi and are well placed to offer support and solidarity.
  2. Engage funders, ensuring they are aware of the situation and advocating for support and budgetary flexibility with grant-holders, as organisations look to manage operational delivery through this challenging and dynamic economic context.
  3. Enter into dialogue with credit unions in Malawi, to explore ways that credit can be extended to SMEs.
  4. Support increased exports from Malawi (arguably the underlying economic issue) by creating a formal UK-Malawi Chamber of Commerce, and working with the UK, Malawian and Scottish governments to support equitable trade with Malawi.
  5. Work with Moto Money to launch a new web and app-based money transfer system, which allows seamless cash transfers (potentially to whole communities) from Scotland to Malawi.
  6. Support the travel and tourism industry in Malawi, working with key partners, to help drive sustainable foreign exchange income into the economy.

If you would like to be involved in the SMP’s efforts delivering on the above points, or if you would like to suggest other tangible actions the SMP could usefully take, please contact our CEO, David at david@scotland-malawipartnership.org.