Malawi’s Economy and IMF’s Austerity

“Déjà Vu All Over Again.”  This is the best way I can sum up what is percolating on the beautiful country of Malawi. Remember Africa of 1980s and 90s, when International Monetary Fund (IMF) inundated many cash strapped countries with austerity measures before granting credit lines to them; this is exactly what Malawi is experiencing at the moment.

For those who do not know anything about Malawi.  It is a landlocked country in southeast of Africa, with a total population of 16,323,044 and a GDP less than $6 Billion. It is among the poorest country in the world. Malawi sources of foreign exchange are tea and tobacco, with supplementary economic aid coming from donors notably World Bank, African Union, IMF and others.

The president of Malawi, Joyce Banda is a powerful and resourceful politician, whose commitment for improving the lives of her people is unquestionable. She was sworn as the first woman president in her country and Southern African region when President   Bingu Wa Mutharika passed away.

President Banda was recently invited to the White House by President Barrack Obama and she was showcased as one of the progressive leaders in Africa. In the company of three other African leaders from Senegal, Cape Verde and Sierra Leone they partake in the political economy dialogue at United States Institute of Peace. President Banda was articulate and very knowledgeable on the economic globalization and she pulled all the strings she can to impress United States investors.

President Banda has limited options to juggle with in order to improve the economy of her country. The country has no adequate source of foreign exchange and there is nothing much President Obama can do for her country unless to dole out a miniature foreign aid which will not make any difference to her country. Malawi is on her own and IMF is not going to make life easy for her country. Although that signing up to IMF austerity measures has opened up to trickling of liquidity, but the price Malawi is paying may be too high.

Trade Liberalization and Tough Austerity Measures

Trade liberalization at its extreme may backfire in Malawi, the sudden removal of all trade barriers may encourage the dumping of cheap foreign commodities in the country. Without the protection of emerging industries from outside competitors, there  may be stunting in the springing and germination of industrial growth in Malawi. The ramification will be registered in the increase of unemployment and inflation. Speaking of spike in the inflationary trends, Malawi has experienced a massive increased in the rate of inflation since the inception of structural adjustment of the economy.

What IMF could not accomplish in Europe has become quite so easy for her to accomplish in Africa. While IMF is struggling to convince Eurozone financial troubled spots to cut down on spending; Malawi, a meager African country has already embarked on one of the toughest austerity measures you can ever think of.

IMF compelled Malawi to devalue her currency Kwacha substantially, and as of today Kwacha (Malawi currency) has been devalued by almost 50 percent. With the devaluation, Malawi Kwacha now floats and was recently reported to be trading for MK400 to $1 US Dollar. Before the floating and being subjected to market forces of demand and supply, kwacha was pegged at MK167 to $1 US Dollar as of first quarter of previous year.

The idea for devaluation is to make Malawi products cheaper for foreign buyers. But the danger for Malawi with her currency devaluation is her limited products to export. Malawi does not have arrays of finished products to export and now with devaluation of Kwacha her agricultural products mainly tea and tobacco will bring in lower returns.

The Malawi was also asked to rein-in spending by removing subsidies given to the poor masses and to privatize public own entities. Malawi external debt stood at $1.214 billion as of 31 December 2012 and servicing of the debt continues despite structural adjustment and reduction in spending.

The bite of the bitter prescriptions by IMF has begun to be felt by the poor masses of Malawi who are mostly subsistence farmers that dwell in rural areas.  The inflation rate stood at 36.4 percent and this is a huge number that it brings Kwacha to its knees, even to a point of insolvency because its value as medium of exchange has been drastically diminished by devaluation and inflation. There be increase in unemployment and prices of essential commodities will soar. All these are already happening.

These conditions are too way harsh for Malawians, this is not to say that Malawi does not need any restructuring of her economy but IMF austerity measures may turn out to do more harm than good. The conditionalities for granting of credit lines and attraction of donors may be self defeating due to enormous toil been foisted on the people of Malawi.

The shock therapy by IMF may threaten the economic and political stability of Malawi that President Banda pledged to stabilize. And it must be noted that sound macroeconomic fundamental may not be unsustainable when the desperate poor masses are left in the cold.

Political stability may unravel when the people become unhappy with the political leaders due to drastic depreciation in the standard of living and undesired scenario may bring about the rise of civil disobedient. And together with sharp rise of criminality may overwhelm the system. And this is not the intended objective that IMF and Malawi policy makers intended in the first place.

Malawi needs some form of reforms but shock therapy without adequate palliative measures to cushion its effect, is not the best way to maintain and achieve sound macroeconomic stability.