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The cost of living – Kwacha devaluation and inflation in Malawi

Malawi is one of the poorest countries in the world. Although Malawi has richness in many other ways, and is not damaged by war, the per capita income (PCI) is very low. According to the World bank’s latest 2021 figures, Malawi’s PCI is the 10th lowest in the word, at US$580. For comparison, the country with the lowest PCI is Burundi, at $220. The US is the 7th richest, at $70,930 and the UK is 26th, with $44,480. In case you are wondering, the richest by this metric is Bermuda, at $122,470.

Another way that the World Bank compares different countries is to calculate the relative purchasing power of money in each country. The Purchasing Power Parity (PPP) is a theoretical exchange rate (using “international dollars”) that allows us to compare how much money is needed to by the same set of goods and services in different counties. In other words, it reflects how many hypothetical “international dollars” would be needed in Malawi to buy a comparable amount of goods and services that a U.S. dollar would buy in the United States. This takes into account labour costs, demand in a particular country, availability of the product etc. For example a barrel of oil will cost less to buy in US dollars in Saudi Arabia than in New Zealand. Obviously, this is theoretical and there is much controversy about which foods, goods and services should be included in the calculations, given that countries vary so much. However, it is more stable than just looking at raw exchange rates and economists do find it useful.

The PPP of the US is Int$70,480. The PPP for Malawi is low – at Int$1610. Again Burundi has the lowest, at Int$780. For comparison, Singapore and Switzerland are at the top of the table, at a little over Int$100,000, the UK value is Int$49,420 and that for New Zealand is similar, at Int$45,440.

A community bank in Malawi

Malawi has always been one of the poorest developing countries but times have got much harder recently, particularly so in areas affected by the lethal force of Cyclone Freddy in March 2023. The population has grown and is now over 20 million, climate change has affected harvests and inflation has been out of control. Many Malawians cannot afford their basic needs for food and shelter, let alone find money for education or to invest in a business.

As we all know, global food prices are very high at the moment. The war in Ukraine has affected exports of wheat and oil and harvest yields in much of Africa are low because of drought and floods. Cyclone Freddy had a devastating impact, destroying lives as well as crops, homes and businesses. It will take a long time to recover. Even before all this, the economic situation was difficult. The World bank had already predicted a slump in Malawi’s economic growth in 2021, due to low agricultural output, erratic electricity supply, high global commodity prices and a shortage of foreign exchange to pay for them.

Year on year inflation reached 26.7% in February 2023. This may be lower than the peak highest rate of 83% in 1995, but it outstrips incomes and makes life very difficult for ordinary Malawians. In May 2022, the Reserve Bank of Malawi devalued the Malawi Kwacha against the US dollar by 25%. This was to reduce the gap between the official exchange rate and the unofficial rates available for cash purchases at foreign exchange bureaux on the parallel (black) market. However, the effect was only temporary and, because of Malawi’s economic problems and the lack of availability of foreign currency, the gap is now wider than it was before the devaluation. Official reserves of foreign currency remain low, impacting how much can be imported into the country and causing shortages of imported goods, such as essential medicines and petrol.

Another issue is government debt and the affordability of repayments. The highest national debt in the world is held by Venezuela, where the economy has been in a state of collapse since 2013, – at 350% of GDP. (GDP, or Gross Domestic Product, is the value of goods and services produced in a particular country over a particular time period, such as a year or a quarter of a year.) The next highest debt to GDP ratios are held by developed countries, headed by Japan, which has a debt of 266% of GDP. The UK debt, as of the end of April 2023, is just over 2.5 billion pounds, which is 99.2% of GDP. Malawi’s debt compared with its GDP is lower, at 64% in 2022, according to the World Bank. However, this is a rise from 32% in 2013 and 55% in 2020. Poor countries are unable to borrow as much money as rich ones and hold much less debt per capita. However, the value of their goods manufactured and services supplied is lower too and hence their GDP is also lower and debt repayments less affordable. In Malawi, the on-going implementation of the Government’s debt restructuring programme means that the World Bank considers debt repayment levels to be sustainable. However, the more money that governments spend on servicing debt, the less there is to spend on development projects within the country or on important services such as health and education.

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