Monday, June 24, 2024

Kabambe lectures Chakwera on economy, says transformation of country’s economy is a big boys job

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Former Reserve Bank of Malawi governor, Dr. Dalitso Kabambe says the country’s economy is very sick. 

Kabambe, who is also Democratic Progressive Party (DPP) presidential hopeful, was speaking during DPP presser at Mount Soche Hotel in Blantyre.

Kabambe, who in his speech doubted if the current government can improve the economy because it has been “tested, tried but failed, said the transformation of country’s economy is a “big boys” job.

According to Kabambe, Malawi’s economy is suffering from Fiscal, monetary and exchange cancers.

Kabambe said: “fiscally, the expansionally fiscal policy the Government has been implementing since 2020 has been nothing but a poisonous chalice.”

“On the one hand, with the need to raise more Government revenues to finance the public pulse in the face of sluggish economic growth, Government introduced punitive taxes, levies, fees and charges and raised some.

“Government also resorted to budget deficits in the order of 7-8 percent of Gross Domestic Product (GDP) against an internationally acceptable best practice of 2.5 percent and below.

“In the past four fiscal years alone, Government has borrowed in excess of K5.1 trillion, (K813 billion in 2020/21, K825 billion in 2021/22, K1.3 trillion in 2022/23 and K2.2 trillion in 2023/24) bringing the total public debt to K9.2 trillion, up from K4.1 trillion at the beginning of the Tonse Alliance Administration.

At this rate, by the time we go to the next General elections in 2025, public debt will be hovering around K14 trillion, with over K10 trillion having been accumulated in 5 years by a single term of Tonse Alliance Administration. This is nothing less than a tragedy.”

“Not only does excessive public debt entail huge public debt servicing costs in the order of K1.2 trillion and above as in the current budget; but also public debt crowds out the private sector thereby from the credit market thereby impairing them to produce more output for the economy in order to increase supply and reduce prices as well as create the much needed paid jobs market for the majority of the population including the Youths.

“This has also led to the depreciation of the currency and shortages of foreign exchange as most Government expenditure, approximately 60 percent, is spent on imported items such as petroleum products, Government vehicles and parts, fertilizers, medicines, office furniture and equipment, plants and equipment and others. Injection of borrowed money into the economy has also led to injection of further liquidity which has generally impaired monetary policy and led to soaring inflation”

To avert the country getting into the current ditch, the DPP has all along provided constructive and effective counsel on workable and practical cost cutting measures. The DPP had suggested that first and foremost, the President should have cut back on his cabinet to no more than 20 including the President and his Vice; Advisors too should have been reduced to no more 5; foreign travels should have been curtailed; local travels should have been reduced to the bare minimum covering critical ones only; Diplomats to Malawi embassies abroad should have been downsized to no more than 5 per embassy; the entire public service should have been streamlined to maintain only critical positions and abolish all non-essential ones, all public servants should be put on strict performance appraisal system with clearly laid out rewards and sanctions to enhance public service delivery, and closing of all loopholes fuelling leakages in public revenues and expenditures.

What is surprising though is that despite raising taxes and borrowing excessively from the market, most Government hospitals are still going without essential medicines and equipment and MDAs operations continue to be strangled through underfunding and general public services are going down.

On Monetary Policy

“The DPP notes with dismay the runaway inflation and the impact it is having on soaring cost of living. The DPP shares the pain and impoverishment Malawians are going through during this difficult period of rising prices of basic commodities and services. Both food and non-food inflation have sharply gone up since the Tonse Alliance Administration came into power. While it is true that some exogenous factors such as the war in Ukraine may explain part of the inflation pick up, but the bulk of the cause of current inflation in Malawi is emanating from a combination of shambolic economic policies.

“Monetary Conditions (MCI) in the country since 2020 have been extremely weak as the current Administration is implementing an accommodative monetary policy stance when the macroeconomic conditions demands tightening of monetary policy stance. At 24 percent policy rate, when inflation is at 28 percent, is simply too loose and recipe for further inflationary pressures, depreciation of the currency and erosion of reserves at faster rate.

The consequence of both loose fiscal and monetary policies is manifesting itself in deviation of macroeconomic fundamentals away from the equilibrium as evidenced by the deviation in inflation far away from the 5 percent medium term target, depreciation of the currency, erosion in reserves, widening of balance of payments, slowing down in GDP and contraction in private sector credit. All these explain why the cost of living in this country is going up and any further delay in policy adjustments will bare nothing more than more pain, misery, anguish and suffering among Malawians.

On a mechanic level, monetary policy stance is determined through a odelling framework that involves forecasting and policy analysis (fpas) and through this modelling framework, one is able to derive at the most optimal and potent monetary policy stance that is able to bring down inflation towards the target, stabilize the exchange rate, grow foreign exchange reserves and grow the economy.

Being a complex modelling process, a simpler version of checking whether the monetary policy stance is potent or not is simply to check whether the policy stance takes into account local inflation, global inflation, exchange rate movements and margin of reward for investors. The policy stance since 2020 has constituently failed this test and the stance keeps on getting weaker and weaker each passing quota. The procrastination in getting right the monetary policy stance entails delayed pain among Malawians in having the current economic challenges subsiding. One would have wished the monetary authorities quickly effected the optimal monetary policy stance to give a chance to the country to start healing.”      

On the exchange rate

“The DPP is deeply troubled with the suffering Malawians are put through to access foreign exchange and the continued loss in value of the currency. While the DPP agrees that external influences and longstanding structural issues explain part of the problem, to a larger extent, the current scarcity and depreciation of the foreign exchange is explained by the Government’s own weak fiscal, monetary and exchange rate policy measures.

“The DPP has noted with concern that the reckless domestic borrowing in 2020/21, 2021/22 and 2022/23 Fiscal Years (K5.1trillion) went towards government expenditure with 60 to 70 percent imported content. This wholly explains the vanishing of foreign exchange in the market; and when you have clueless a government that cannot properly manage its own expenditure as is the case now, the consequences are what we are seeing now.

“This also becomes compounded when monetary conditions are weak which has been the case in the past three years. With the attendant poor fiscal and monetary policy conditions coupled with the ever growing misalignment between the official and parallel rates, there was no way the Kwacha could withstand the onslaught, hence the loss in value and scarcity.

“The above notwithstanding, exchange rate policies fall in three main categories, namely, fixed, floated and managed float. Each regime determines the kind of tools one uses to ensure stability of the exchange rate and availability of foreign exchange. In the case of the current regime, it confuses elements of all the three. Publicly, through forex auction markets, one would think the current regime is floated and yet from a practical perspective of the wide misalignment between the official and parallel market rates, the regime is obviously fixed.

This confusion is certainly creating practical problems as to which tools should be used to effectively manage both the path of the exchange rate and ensure availability of foreign exchange.

“The DPP would advise the Government to choose one regime they wish to deploy and implement necessary but effective tools to deal with the current persistent foreign exchange challenges. Otherwise, the sham exchange rate regime is not only recipe for rent seeking behaviors by those managing the official exchange rate markets, it is also heavily militating against exporters and foreign exchange generators.

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