…Your MK500 now has the value of MK375
Amid an economic downturn that has seen the shortage of essentials as well as price hikes, the Reserve Bank of Malawi has announced an unprecedented 25% devaluation of the local currency, Kwacha. This has come hot on the heels of negotiations for a bailout that Malawi has initiated with the International Monetary Fund. What does this mean for the common person?
An easy way of understanding what a 25% devaluation of Kwacha means is to use an example of a person who has a MK1000 note right now. Once the currency is devalued, it loses its value by 25%. That is, even if the denomination of the paper remains MK1000, it will not be able to purchase goods worth that amount in the soonest time possible.
The currency will be devalued tonight but this does not mean that come lunch then things will have skyrocketed. It will be in a few days, but be assured that very soon then the bite gets to be felt. So, for example, if you were able to buy a 1 KG packet of sugar at MK1000, now that same packet will have to go for MK1250 or more. Or, to maintain the balance, then the sugar might just be reduced to 750 grams.
Very importantly is that we will see the Malawi Kwacha lose value over major currencies. At the moment, the official trading rate of the Kwacha against the US dollar is MK825 but with the 25% power loss of the Kwacha, it should be expected that this official rate will be hitting around MK1000.
What does this mean for you?
Take anything that you buy from outside of the country. For example, oil. If the price quoted in dollars was 2$ per litre and you had to pay MK1650 for that litre, now you will have to be paying around and most likely above MK2000 for the same litre. Once fuel goes up then as well anything goes up.
Government might consider a cushion, which is unlikely considering the grim outlook so far, but on direct transactions that you make over products produced in other countries then nothing will happen. In Malawi, these products range from baking flour, cooking oil, clothes, entertainment (DSTV, Netflix), cosmetics, toilet paper and almost everything.
Even for those things produced in Malawi such as maize or domestic food, their prices will also have to go up because the sellers will also need to raise money for trading with the outside world. So, a maize seller who also has to pay for DSTV or needs to buy a car for transporting the maize will have to hike it so that they are able to meet the expenses of services that they do not obtain internally.
The decision to devalue the currency can is Malawi throwing in the towel in its push up with the IMF. Here is Malawi saying that it needs help and starting to meet the conditionalities of that help.
The situation has been that Malawi has been running low on its reserves of the US dollar which is used to literally buy everything on the international market from hospital drugs, fuel, to the toilet papers from overseas.
Next time widely consult on the impact of devaluation before you make those horrendous conclusions. 25% devaluation doesn’t necessary mean 25% increase in inflation. Mmmmm who told you that?