Sunday, February 05, 2023

Resolving High Inflation, Forex Shortage and Huge Debts

A few days ago, the Minister of Finance and Economic Affairs demanded solutions for high inflation, forex shortage and huge government debt. So today, I tried to ask Open AI Chat for a solution. This is what I got:

 Resolving high inflation, forex shortage, and huge government debts requires a comprehensive and coordinated approach that involves a combination of monetary, fiscal, and structural policies. Here are some steps that can be taken:

  1. Monetary policy: The central bank can tighten monetary policy by raising interest rates, reducing the money supply, and controlling inflation.
  2. Fiscal policy: The government can implement fiscal reforms such as reducing government spending, improving tax collection, and reducing corruption to improve fiscal sustainability and reduce the debt burden.
  3. Improving trade balances: The country can strive to improve its trade balance by increasing exports and reducing imports, which can help alleviate the forex shortage and reduce the need for foreign borrowing.
  4. Structural reforms: Implementing reforms to increase labour market flexibility, improve the business environment, and reduce corruption can help increase productivity and competitiveness, reducing inflation and improving trade balances.
  5. Debt restructuring: In some cases, it may be necessary to restructure the country's debt to make it more manageable and sustainable.
  6. Exchange rate policy: The central bank can use the exchange rate to help alleviate forex shortage by allowing the currency to appreciate or depreciate to improve competitiveness and reduce the trade deficit.

It's important to implement these measures gradually and carefully to avoid unintended consequences and maintain economic stability. Additionally, the policies should be tailored to the specific circumstances of the country. Effective policy coordination and communication among various government agencies and stakeholders can also help ensure a more successful outcome.

Tuesday, August 16, 2022

Valuing the Malawi Kwacha: Real Exchange Rate

 So with several pushes for devaluation and depreciation of the Malawi Kwacha, I recalled there is a way of assessing the exchange rate if a currency is over-valued or under-valued against another. So I did some research yesterday and came up with a script to help me with the assessment. 

The Real Exchange Rate(Ereal) is the ratio of the Nominal Exchange Rate(Enominal) to the PPP Exchange Rate(Eppp). The following conditions are expected:

  1. When the Real Exchange Rate is equal to one, the currency is neither over-valued nor under-valued.
  2. When the Real Exchange Rate is less than one, the domestic currency is over-valued in relation to the foreign currency.
  3. When the Real Exchange Rate is greater than one, the domestic currency is undervalued in relation to the foreign currency.
So we will have to define each of the two exchange rates Enominal and Eppp.
  1. Enominal = Cdomestic/Cforeign, where Cdomestic is the domestic currency value and Cforeign is the foreign currency value.
  2. Eppp = Pdomestic/Pforeign, where Pdomestic is the Domestic Price of a Commodity, and Pforeign is the Foreign Price of the same Commodity.
The source code is as follows:


I have published the source code on https://github.com/kondwa/valuation

Let's have some examples:
  1. So let's assume that the dollar is our domestic currency and the euro is our foreign currency with the nominal exchange rate(Enominal) = $1.18/€1. a Big Mac costs $5.30 in the US and perhaps €4.50 in Europe. The script is able to evaluate that "The Foreign Currency is neither under-valued nor over-valued relative to the Domestic Currency."
  2. Suppose instead of €4.50, the Big Mac is selling at €5.40 due to inflation while the nominal exchange rate is the same. The script evaluates that "The Foreign Currency is 20% overvalued relative to the Domestic Currency."
  3. Let's compare the Chinese Yuan and the US Dollar: One US Dollar buys ¥6.8. A Big Mac costs $5.30 in the US, and costs ¥20 in China. The script evaluates that "The Foreign Currency is 45% under-valued relative to the Domestic Currency."
It seems the script is in conformity with the IMF example on the Real Exchange Rate.

We can now try and apply it to the Malawi Kwacha relative to the Dollar:
Yesterday(15th August 2022), the nominal exchange rate was K1,020.00 to $1 and the price of Gold in Malawi was K41,000, while it was $58 in the USA. We evaluate the Real Exchange rate as follows:
Domestic Currency: 1020
Foreign Currency: 1
Domestic Price: 41000
Foreign Price: 58

This gives an evaluation that "The Foreign Currency is 44% overvalued relative to the Domestic Currency."

Saturday, June 25, 2022

Meeting the National Fertilizer Demand


 

After reading the Times Newspaper Article on the AIP program (https://times.mw/red-flag-on-affordable-inputs-programme/), especially looking at the need to import 700,000 tonnes of fertilizer costing $800 per tonne, I thought $560 million was a lot to spend on fertilizer imports every year and yet such an amount could possibly be invested in building local fertilizer manufacturing plants. I understand we have two fertilizer manufacturing plants Optichem and Malawi Fertilizer Company. The problem is their combined output is 160,000 tonnes per year. It's possible we need several manufacturing plants to meet the required demand of 700,000 tonnes.

After a google search, I found several companies from China advertising fertilizer manufacturing plants. I managed to get a quote from one. The quotation has the following cost analysis:

  1. Equipment costs: USD 1,245,570
  2. Workshop size: 5760 m2
  3. Workers: 8-15 person / batch
  4. Power: 845 kw; real power: 590 kw
  5. HS code: 8479 8999 90

The Quoted solution is able to manufacture 30 to 40 tonnes per hour. For an 8-hour day and 260 working days per year, one plant should be able to manufacture 62,400 to 83,200 tonnes. This means that we need 9 to 12 manufacturing plants built to meet the demand of 700,000 metric tonnes per year. This should be a total cost of between $11,210,130 and $14,946,840. This seems a much better amount spent once on fertilizer manufacturing plants than to spend $560,000,000 every year.

Those who are interested in obtaining the full quotation can email me their interest at kondwa@gmail.com.

Thursday, May 19, 2022

Valuing the Malawi Kwacha




 
Challenged by the ever depreciating value of our currency based on several factors on the forex market and other economic factors, I thought I should consider using the value of the metal used in minting our basic coins as determinants of the cost of the Malawi Kwacha. In other goods and services, we get to have the cost of raw materials and cost of production as the determinants of the cost price of a product. I thought the cost of the metal used for the coins as a raw material can determine the cost price of the Malawi Kwacha. 

According to the Reserve Bank of Malawi and Numista Coin Catalogue, the Malawian One Kwacha coin is made of 2.83 grams of stainless steel. Stainless steel is said to cost at least $3 per pound as of 2018 according to this article:

Steel prices change daily. They are primarily driven by supply, demand and energy prices. Galvanized steel costs a few cents more per pound than regular structural steel. Stainless steel costs four to fives times much as galvanized steel in material costs. Structural steel is holding somewhere between 30 to 80 cents per pound, while stainless steel is at least $3 per pound. 

Source: https://sciencing.com/facts-7621048-do-compare-4140-4150-steel.html 

So the maths go as follows:

One Kwacha weight = 2.83 grams
Cost of stainless steel today = $3 per pound.
1 pound = 453.59237 grams.

2.83 grams = 1 pound x 2.83 grams / 453.59237 grams = 0.006239082019832 pounds

now if 1 pound stainless steel costs  at least $3,

0.006239082019832 pounds = $3 x 0.006239082019832 pounds/1 pound = $0.0187172460594961

One Malawi Kwacha costs at least $0.0187 to four decimal places.

On Google, MWK1 to USD gives K1 = $0.0012. This seems to be way too lower than the cost price of the coin.

One US dollar should cost at most

$1 = K1 x $1/$0.0187 = K53.4759

If we are to go by the cost price, K1 is at least $0.0187 instead of $0.0012 and $1 is at most K53.4759 instead of K815.

It is said that the value of the currency is determined by the supply and demand but that can't be the only determinant. The Cost Price plays a big role in deciding the minimum selling price of goods and services to avoid making losses. As such, where the Malawi Kwacha coin is made of 2.83 grams of stainless steel, and the price of stainless steel is at most $3 per pound, the Malawi Kwacha can't be valued at less than $0.0187 and can't be exchanged at more than K53.4759 per dollar.

The cost price of the coin does not just include the value of stainless steel which is the raw material, but there is a cost of minting the coin involved. which means that the value of one kwacha can be more than $0.0187 and the dollar lesser than K53.4795. These lower bound and upper bound values should determine whether an exchange is possible or not. Otherwise, why should we sell so cheap? We don't have to sell if we are selling at a loss.




Wednesday, May 18, 2022

Of Forex Shortage and Ethiopian Airlines Ticket Sales Discontinuing


 
I think the issue of forex shortage should not be a problem between Malawi and Ethiopian Airlines because according to tradingeconomics.com, Ethiopia seems to import more from Malawi than Malawi imports from Ethiopia. In 2020, Malawi imported goods and services worth $7.86 million from Ethiopia and Ethiopia imported goods and services worth $17.03 million from Malawi. Ethiopia can decide to clear out the value of the Malawi imports against their imports and remit the difference which is a surplus of the balance of payment to Malawi. Surely, if Ethiopian Airlines is one of the services Malawi imports from Ethiopia, Malawi technically has the ability to settle this payment. If trading in dollars, pounds or euros is the problem, I should believe that if Ethiopia is able to remit its trade surplus in Ethiopian Currency(ETB), we would be able to settle the current amount and future purchases of Ethiopian Airlines tickets using the Ethiopian currency.

I am a proponent of the idea that trade between Ethiopia and Malawi should not be settled using a third-party currency like the dollars, euros or pounds when Ethiopia and Malawi both have currencies of their own. Ministry of Trade & Industry - Malawi could consider facilitating a trading arrangement between Ethiopia and Malawi where we can trade in our own local currencies, the Malawi Kwacha(MWK) and Ethiopian Birr(ETB) after all there is a profitable bilateral trade between the two countries to the advantage of Malawians.