Devaluation of the Malawi Kwacha - what is the way forward?

The Reserve Bank of Malawi today, 7 May 2012, announced a 48% devaluation of the Malawi Kwacha (MK) against major trading currencies such as the US Dollar. The US Dollar is now trading at MK252.00. A devaluation will, not on its own, improve the current economic situation, but it is a necessary first step to mop foreign currency from the informal to the formal currency market. Furthermore, a devaluation generally stimulates demand for export oriented production. It not only helps to increase the competitiveness of our exportable products and services but also helps to minimise the demand for imports thereby saving the country the much needed foreign currency.

What is required, therefore, is for the Malawi Government to urgently introduce further measures to promote exports, that is to increase production and value addition to exportable products. In the interim, we can look at further incentives in the tobacco sector, cotton, sugar, tea, coffee and other exportable agricultural products. We can also look at other important agricultural products such as maize, pulses, groundnuts, spices (such paprika) etc. As people are harvesting their crops now, what incentives can we provide in order to turn them into exportable products? For example, I would recommend provision of support to groups of farmers or interested firms for processing and value addition in various agricultural products, through removal of certain duties and taxes on importation of processing and packaging equipment and machinery (all these applying only for export oriented value addition).

We also have a uranium mine in Malawi, which is an export oriented venture - we need to look at what further incentives we can provide to Paladin, the mining company, in order to increase production of the uranium ore to boost our exports. We should discuss with the company to increase its production in order to take advantage of the devaluation that will make Malawi's uranium ore more competitive. A comprehensive assessment of our export potential is urgently needed right now to make use of the 48% currency devaluation.

Malawi has over 50% of its population living below the poverty line equivalent of $1 a day. In this case, the poor will be greatly affected by the current policy decision - they will be more vulnerable to the shock. They need urgent social protection support and so too do the small to medium scale entrepreneurs. To ameliorate the current desperate economic situation in Malawi, the Government ought to provide a mix of interventions. The Government of Malawi is planning to introduce public works programmes, where the people will have an opportunity to work for at least 12 days per month in order to earn a monthly wage. The public works programmes are a very good social protection or safety net measure meant to cushion the poor against the shocks of a devaluation. The devaluation is a shock to the economy in that in the interim it will cause some inflationary pressure on the economy (the prices of goods are generally going to rise due in part to the subsequent increases in interest rates). The social safety nets are therefore a short term mechanisms to help the poor survive the shock. In the long run, Government has to bring in other policy interventions, some of which have been suggested above - and this ought to be treated as a matter of urgency.

As a matter of background, it is important to note that social protection mechanisms are not new in Malawi - they have been there mostly from the 1980s upon adoption of IMF/World Bank structural adjustment programmes (SAPs) to perform the exact function that Government is intending now - to cushion the poor against the structural adjustment shocks. Furthermore, the current devaluation is one of the SAP measures. Historically, Malawi used to rigidly control the value of the MK during the one-party rule of Dr. H. Kamuzu Banda's time until it was floated at the advent of a prulalist democratic system of government in 1994. The Malawi Social Action Fund (World Bank sponsored) was a pinnacle of social protection, which I do not know how successful it is now. But during Bakili Muluzi's tenure as president of the Republic of Malawi (1994-2004), MASAF was a great real success story that was replicated in a number of African countries including Tanzania (TASAF), Zambia (ZAMSIF), Nigeria and other countries. MASAF, designed with assistance from the World Bank, got its lessons from Sri Lanka and Pakistan. By the way, I worked for MASAF then. If it weren't for MASAF, the SAPs which were implemented in full during Muluzi's era, such as privatisation of state assets, some parastatal institutions and businesses; floatation of the Malawi Kwacha; liberalisation of interest rate system; re-organisation of the public service among others, the negative effects of SAPs on the poor would have been worse. President Bingu wa Mutharika the third president of the Republic of Malawi ruled from 2004 to 2012. President Mutharika did not show any keen support of MASAF and therefore re-organised the institution into a decentralisation support mechanism, rendering its impact rather luke-warm and weak. My own view is this that: had Mutharika's government maintained MASAF and complemented it with the successful agriculture subsidy programme, Malawi would have reduced poverty to around 30% and be on track to achieve all the Millennium Development Goals (MDGs), which are due for evaluation in 2015.

By re-introducing the public works programme (which I would suggest, should just mean revival of MASAF in its old form) and continue with the agriculture subsidy programme the current Government will succeed in the shortest period of time where the Mutharika government failed.

With the right mix of interventions, both interim and long term, we will have embarked on the necessary rather painful steps to long term sustainable economic recovery. There is no short-cut to healing a failing economy. The devaluation is a positive first step, but much more needs to be done for the whole economy to be vibrant.

Kennedy Lweya, PhD
Nairobi

EC Consultation on Food Security Policy

In August 2010, the European Commission (EC) embarked on a consultative process, through a discussion paper, on its Food Security Policy for developing countries. The following comments were provided.

The need for a comprehensive EU Policy on Food Security as it relates to developing countries is long overdue. However, this policy needs to be combined with a reform of the current EU's Common Agriculture Policy (CAP). The CAP regulates the payment of agricultural subsidies and programmes and constitutes 48% of the EU's budget.

For now, I provide herewith feedback to three of the questions raised in the discussion paper:

Question 2. In your view, which are the main strengths and weaknesses of the current European Community / EU Member States action in the areas of agriculture and food security?

The main weakness of the current European Community / EU Member States action in the areas of agriculture and food security revolve around the EU’s Common Agriculture Policy (CAP), particularly as it relates to the provision of agriculture subsidies to promote agriculture in the EU, and the terms of agricultural trade as it relates to the phyto-sanitary requirements. The CAP’s provisions outlined above, among others are a major hindrance to the promotion of agriculture in developing countries in that they skew the balance of trade in favour of the EU. This is and has been a major disincentive for sustained investments in agriculture in developing countries. While developing countries are making every effort to promote agriculture and food security, the continued existence of the above mentioned EU policies will continue to be a cause for declining investments in agriculture in developing countries thereby exacerbating food insecurity. For example, a recent call, through the African Union’s (AU) New Partnership for Africa’s Development (NEPAD) Comprehensive Africa Agriculture Development Programme (CAADP) for a minimum of 10% African Government’s budgetary allocation to agriculture is a step in the right direction on the part of developing countries. However, as a major trading partner for Africa, the EU’s CAP in its current form will continue to be a stumbling block to the promotion of agriculture and food security in Africa and other developing countries - simply put, developing countries' agriculture products cannot compete in the current world agricultural trading frameworks.

Question 7. What role do you see, if any, for the EU development policy to contribute to increased food production in developing countries and the availability of food (directly and/or indirectly)? And how could animal and plant health best be integrated in all pillars of food security policies and strategies?

(a) The EU should support greater and sustained investments for the development of infrastructure in developing countries – these include better roads, railway lines, airports and telecommunications. These are necessary push factors for the promotion of agriculture and achievement of food security in developing countries.

(b) The EU should help facilitate better market linkages with developing countries – the market linkages should be based on fair terms of trade. For far too long, agriculture products have not received a fair deal in terms of producer prices.

(c) The EU should promote value addition for agriculture products where they are produced in developing countries – the continued policy of accepting to buy only raw materials from developing countries, has to a large extent been the reason for developing countries not getting a fair deal in agriculture trade. Why can’t the EU import processed tea or coffee or rubber from developing countries?

Question 8. Which, in your views, are the main policy constraints and opportunities in developing domestic/regional trade markets in developing countries, in particular for south-south integration? Do you consider that the EU should play a role in such development and if so, which one?

Economic Partnership Agreements (EPAs) promoted by the EU have been a major concern for most developing countries. The EPAs have been viewed as counter-productive to the spirit of fostering regional integration among developing nations. The EPAs have been seen as a major source of divisions among developing nations in that as individual nations, developing countries have had weakened bargaining power in-so-far as trade agreements are concerned with the EU. Is the EU going to allow itself to be seen as a using “divide and rule tactics” in its bid to foster trade with developing countries? While the EU is a good model for a unified trading block or regional integration, the EPAs are seen as weakening efforts aimed at fostering similar integration and co-operation among developing nations. For example, by splitting the African Caribbean and Pacific (ACP) trading bloc into six EPAs sub-regions, the EU is working against the South-South co-operation.

Kennedy B. Lweya, PhD
August 2010

Reshaping Our Common Future

Friends,

For many, 2011 has been a very eventful year. We witnessed a lot of change in all sectors of life and in every corner of the world - largely positive. But a lot of textbooks will have to be re-written, particularly on the traditional worldviews regarding macro-economics, the political economy, trade and development.

It is for this reason that, as development practitioners, economists, evaluations experts, and all manner of professions, 2012 will require a deep introspection and a re-scanning of the "new world order" in order that we can re-work the fundamental principles for us to remain relevant and responsive to the emerging development needs and new global realities.

We should take 2012 as a dawn of a new era where the basic foundations of the past have been shaken, a new awakening, new opportunities and challenges - all requiring new strategies and solutions. How do we consolidate the momentum of change? Global, state and non-state institutions will have to be reshaped to charter a new course.

Overall 2012 provides hope as a year of renewal and new beginning – we should remain hopeful.

Very best wishes to you all in the New Year!

Regards
Dr. Kennedy B. Lweya

UK firm signs Lake Malawi oil exploration deal

There is ongoing debate on many Malawian internet discussion forums regarding the granting, in 2011, of an oil exploration licence on Lake Malawi to a British firm, Surestream. Views on this deal have been mixed, ranging from environmental concerns considering the importance of Lake Malawi to people’s livelihoods and as a tourist destination; to political concerns particularly in view of the strained diplomatic relations between United Kingdom and Malawi.

Some commentators have questioned the wisdom of granting the oil exploration licence to a British firm when the British Government has withheld its development aid to Malawi due to the recent diplomatic wrangle between the two countries that led to the two governments expelling each other’s High Commissioners. In response to one such comment, I offered the following opinion:

As many have rightly argued, the British Government has indeed withheld aid to Malawi. However, they have not stopped "trading" with Malawi. Every economy thrives better with more trade. The oil exploration deal between the Malawi Government and Surestream is a trade deal and therefore, is not and should not, in my view, be affected by the diplomatic wrangle between the two governments. Business and trade between the two nations should continue for the benefit of the people of the two nations. Besides, efforts are already underway to try and amicably resolve the strained relations.

On Surestream and its oil exploration rights on Lake Malawi, I have been able to establish more information on their website. In 2009 or thereabouts, Surestream was awarded a similar licence in Burundi to explore oil on Lake Tanganyika. You will probably be aware that Lakes Tanganyika and Malawi are both Great Rift Valley Lakes. In Burundi, the company has gone a step further to institute an environmental impact assessment (EIA) - this signals that there is oil in Lake Tanganyika:

Surestream says: "Lake Tanganyika is perceived by some professionals as an analogue of Lake Albert where the discoveries that have been made to date are close to 2 billion barrels. This view has aroused more and more interest among the oil industry". http://www.surestream-petroleum.com/news.aspx

In Uganda, oil drilling has already started in Lake Albert. In Tanzania Total has already been granted a license to start drilling for oil in Lake Tanganyika. I dare say, considering the similarities between Lakes Albert, Tanganyika and Malawi, there are serious prospects of similar or even more quantities of oil in Lake Malawi.

As long as the cost-benefit analysis is favourable or points to more benefits and that we can manage or mitigate the externalities (including environmental) caused by the mining venture (including oil exploration) then let us go for it. How the benefits are managed and distributed is of course also a matter of policy - it can be resolved for the benefit of the nation at large.

Dr Kennedy Lweya

A Zero Deficit Budget for Malawi?

The Government of Malawi has announced its intention to have a “zero deficit budget” for its 2011/2012 financial year. Analysts have pointed out that this will be the first ever attempt at achieving a “zero deficit budget” in the 47 year post-independence economic history of the country. Malawi has traditionally relied on external assistance from multi-lateral and bilateral donors to finance around 40% of its annual budget. A “zero deficit budget” will not necessarily mean that the country will not rely on support from its development partners for budgetary support. However, with strained relations between the country and some of its traditional bilateral donors such as the United Kingdom, the country’s objective in the short and long run might be to strive for less reliance on external assistance for its development agenda. One starting point for achieving financial and economic independence might be a “zero deficit budgeting” strategy.

Under the “zero deficit budgeting” Malawi has said that it intends to finance all its recurrent expenditure from local resources. However, the country still expects external assistance for its development expenditure.

The ensuing debate on a "zero deficit budget" has caught a lot of interest and definitely my interest. I just want to give a few pointers:

Firstly, I would like to state this premise: ‘a "zero deficit budget" is feasible for any country including Malawi’. There are three possibilities to achieving a "zero deficit budget" (a) the simplest is that a country cuts on its spending to match its prevailing local resource base; (b) the most difficult is to maintain or increase spending pattern but this will call for increased resourcing and therefore widening the local resource base, and (c) the other option is to have a bit of both (a) and (b) - cut spending but also broaden the local resource base.

Both budgeting options (a) and (b) suggested above have implications, viz:

(a) if Malawi decides to cut its spending, particularly on basic social services such health, agriculture and education, which constitute the largest share of budgetary expenditure, these cuts might have serious repercussions on future economic growth. While the situation might be manageable in the short run, it can curtail current and potential economic gains in the long run.

(b) if Malawi decides to maintain its current budgetary expenditures or spending levels or even increase them but broaden its resource base, particularly by financing them from its internal sources, this could prove painful to tax payers in the short run but potentially make economic growth sustainable. The immediate difficulties will arise from increases in tax rates and a broadened tax base, and increases in interest rates.

In the long run, Malawi might be embarking on a painful but necessary path for real and sustainable economic growth for the country. For how long shall the country continue to depend on external assistance for its economic growth? Eventually, Malawi has to attain economic independence.

Kennedy Lweya, PhD
Nairobi, 24 May 2011

Investing in Electricity Infrastructure

A Catalyst for Sustainable Development in Malawi

Millennium Challenge Corporation Grant
On 5 January 2011, the Millennium Challenge Corporation (MCC), a U.S. Government agency designed to work with developing countries, awarded a major grant to the Government of Malawi. The grant, totalling US$350.7 million will be used to improve the country’s electric power system. This grant is not only timely but also very significant considering that other recipients of similar grants in 2011 will be Governments of Ghana and Georgia.

The Drivers of Success
The MCC is based on the principle that aid is most effective when it reinforces sound political, economic, and social policies that promote poverty reduction through economic growth. For this reason, I believe there are four main drivers that convinced the MCC to award such a grant to the Government of Malawi.

Firstly, the need to invest more resources in electricity infrastructure is enormous and critical, particularly at this stage in the development path of the country whereby there is rapid growth in the country’s population, estimated at 14million which has led to increased demand for energy. At the same time the existing electricity infrastructure cannot meet the increased demand – demand is exceeding supply by a very wide margin. Yet, by investing in energy particularly electricity infrastructure now, the potential and opportunities to make significant gains in poverty reduction efforts are at their highest due to complementary favourable policies outlined below.

Secondly, the country is being recognised for the significant progress in better macro-economic management policies. This is reflected in the drop in inflation rate to 6.4%, which is the lowest since 1996.

Thirdly, major strides have been made in improving food security in the country. This has been achieved through the countrywide promotion of the agricultural subsidy programme which has supported small scale farmers to access cheaper farm inputs such as inorganic fertilisers and improved seed varieties.

Fourthly, there is greater commitment to good governance, accountability and transparency.

Way Forward
The MCC grant will go a long way in contributing to socio-economic development of the country. However, the following suggestions should be considered in the application or implementation of the grant funds:

(a)The funds should be applied to the improvement of electricity generation capacity by building new and upgrading existing power generation plants;
(b)The funds should help in the installation of new and upgrading of existing electricity transmission infrastructure such as grid lines to cater for strategic urban and rural development centres;
(c)The funds should help speed up the rural electrification programme in order to make electricity more accessible to people, the majority of who live in rural areas.

Expected Impact
Investment in electricity generation and distribution in both urban and rural areas is going to be a major catalyst for the country’s socio-economic development efforts. Some immediate gains from such investments will include the promotion of small to medium scale industries in such sectors as: agriculture (agro processing), mining and tourism.

Increased supply and access to affordable electricity will also have a positive impact on environmental protection and climate change adaptation. Affordable electricity will provide an alternative to fuel-wood as a source of energy. The use of fuel- wood by the majority of Malawians as a source of energy has been singled out as a major contributing factor to environmental degradation through deforestation. If trees are conserved, Malawi will stand to benefit climatically through carbon sequestration and potentially benefit from the carbon trading and financing facilities that will be more effective with the agreements reached at the Cancun COP 16 – United Nations Global Climate Change Negotiations held from 29 November to 11 December 2010.

Overall, providing access to affordable electricity just like water, food and shelter should be an integral part of any government policy agenda which is aimed reducing poverty and improving the people’s well being.

Kennedy Bisani Lweya, PhD
6 Junuary 2011
Johannesburg, South Africa

Unpacking Agriculture and Food Security

How can we achieve global food security?

Global Hunger
Today our world is home to 6.7 billion people; 25,000 people (adults and children) die every day from hunger and related causes; 963 million people do not have enough to eat - more than the populations of USA, Canada and the European Union. Of the total number of over 963 million chronically hungry people, over half are in Asia and the Pacific and about a quarter are in Sub-Saharan Africa.

In this article, I discuss the most important issue(s) in relation to agriculture and food security and how these can help to resolve the problem of global hunger.

What is the role of agriculture?
There is no doubt about the fact that food will only be available in the world through sustainable agriculture production. We have witnessed, sadly, in the last twenty to thirty years the world veering away from this fact – the result of which was the catastrophic global food crisis experienced in the latter part of the last decade, 2007 to 2008 to be precise.

We need to learn from our past mistakes - we cannot continue to neglect the important role that agriculture plays in socio-economic development. Suffice to say that agrarian reform has been a catalyst for economic growth and development for most nations deemed developed today in the Americas, Europe and Asia. As such, state as well as non-state actors need to work together to achieve food security and combat global hunger. There is need to increase lobby and advocacy, and the provision of technical expertise to governments and multi-lateral institutions to keep up the momentum on the following two important milestones achieved in the last 3 years: (i) There is greater global recognition of the role and contribution of agriculture to global poverty reduction efforts; (ii) There a general consensus among governments on the need to increase investment in agriculture - at least 10% annual budgetary allocation has been agreed by African Governments through the Comprehensive African Agriculture Development Programme (CAADP) - a programme of the New Partnership for Africa's Development (NEPAD).

However, stumbling blocks remain in the way for significant improvements in global agriculture outputs - the main one is the delay in concluding the WTO's Doha Round of talks in relation to agriculture subsidies.

What does the future hold for global food security?
The World Food Summit of 1996 defined food security as existing “when all people at all times have access to sufficient, safe, nutritious food to maintain a healthy and active life”. Food security has three main pillars or strands: (a) food availability, which is defined as sufficient quantities of food available on a consistent basis; (b) food access, which is having sufficient resources to obtain appropriate foods for a nutritious diet, and (c) food use or utilisation, which is appropriate use based on knowledge of basic nutrition and care, as well as adequate water and sanitation.

The main obstacle to achieving global food security is its second strand, that of access. A lot of effort has been put to improve availability of food through production, as can be seen from the initiatives and commitments discussed in 5(a) above. Access, in my view, is the second tier or step towards achieving food security. Experience shows, however, that in most agriculture and food security strategies issues of access tend to receive less attention or even get completely left out at the expense of increasing agriculture production. For example, in 2010 Malawi had a bumper yield of maize which led to surplus stock of the same in its national grain silos and yet a significant proportion of people in districts of Nsanje and Chikhwawa were food insecure. A lesson from this case is this, while by measure of food production/availability the country is nationally food secure, the challenges of inequitable distribution and access show that there is food insecurity at the household level in some communities aforementioned.

Yet we also know that, if the issue of access were effectively resolved, the world would attain food security right now because there is enough food globally to feed everyone BUT this food is inequitably distributed. Hence the role of food aid programming in this aspect - I believe that the primary strength in food aid programming lies in its logistical capabilities, which help to resolve the current distributional (access) challenges. Therefore, while addressing agriculture production issues raised above any meaningful agriculture and food security strategy should also focus on finding solutions to the problems of access and utilisation, which is the ultimate outcome of food security.

Kennedy Bisani Lweya, PhD
5 Junuary 2011
Johannesburg, South Africa