Strong currency vs Weak Currency

 

The question of weak currencies and strong currencies has bothered me for quite a long time for I have observed Western countries forcing African countries to have weaker currencies in order to improve the competitiveness of their exports on the international market but I have seen this only benefits the western countries themselves in form of cheaper goods from African countries. I decided to ask ChatGPT and it responded as follows:

Why do Western countries prefer strong currencies and encourage and sometimes force African countries to have weak currencies?

There is no one answer to why Western countries prefer strong currencies and sometimes encourage African countries to have weak currencies, as there are a variety of factors that come into play. However, I'll outline some of the most commonly cited reasons:

1. Trade competitiveness: Strong currencies can make exports from Western countries more expensive, which can reduce their competitiveness in global markets. On the other hand, weak currencies can make exports from African countries cheaper and more attractive to buyers in foreign markets.
2. Investment opportunities: Strong currencies can provide more attractive investment opportunities for Western investors, as they can earn higher returns in countries with strong currencies. Additionally, weak currencies can make investments in African countries less attractive to foreign investors, as the risk of currency devaluation is higher.
3. Balance of payments: Strong currencies can help Western countries to maintain a favorable balance of payments, as they reduce the cost of imports and increase the value of exports. Weak currencies can have the opposite effect in African countries, as they increase the cost of imports and reduce the value of exports.
4. Political influence: Strong currencies can provide Western countries with more political influence in African countries, as they can use their economic power to promote their interests. Weak currencies can reduce the political influence of African countries, as they are less able to resist the influence of foreign powers.

It's important to note that the relationship between currency strength and economic development is complex, and there is no one-size-fits-all solution for African countries. Each country has its own unique set of economic, political, and social circumstances, and what works for one country may not work for another. Additionally, some African countries have made efforts to strengthen their currencies and reduce dependence on foreign aid, and these efforts have shown positive results in terms of economic growth and stability. 

 - #ChatGPT

The benefits of stronger currencies seem to outweigh the benefits of weaker currencies by way too far. I wouldn't want African countries to continue weakening their currencies.

African Union seeks to establish the African Central Bank between 2028 and 2034. One of the objectives is to "Promote exchange rate stability and avoid competitive exchange rates depreciation". This is an important shield we need against the Western influence on our currency values for their benefit and we need this shield yesterday. 

While we wait for the establishment of the African Central Bank, we should strive hard not to devalue our currencies further even when pressured by Western institutions like World Bank and IMF. A weak currency is not for our benefit but the benefit of Western nations to allow them to import our goods cheaply and export their goods expensively to us.

 

Breaking out of Poverty

 
So I had a chat on ChatGPT on the issue of breaking out of poverty. Here is how it went:

What can countries do to break out of poverty?

Breaking out of poverty is a complex and multifaceted challenge that requires a combination of factors to be successful. Some of the key strategies that countries can use to reduce poverty include:

1. Economic growth: Encouraging economic growth through private sector development and foreign investment can help create jobs, increase income and reduce poverty.
2. Education: Investing in education can help equip individuals with the skills and knowledge needed to participate in the modern economy and improve their standard of living.
3. Infrastructure: Developing infrastructure, such as roads, transportation, electricity and communication systems can help improve access to markets and create economic opportunities.
4. Agriculture: Improving agricultural productivity through investment in technology and extension services can help increase food security and raise rural incomes.
5. Health: Improving health outcomes through access to healthcare and hygiene education can help increase productivity and reduce poverty.
6. Good governance: A stable and well-functioning government that is accountable and transparent can help create an enabling environment for economic growth and poverty reduction.
7. Social protection: Providing social safety nets, such as cash transfers, food assistance, and health insurance can help vulnerable populations cope with economic shocks and reduce poverty.

It's important to note that the specific approach to reducing poverty will vary depending on a country's unique context and challenges, and will often require a combination of both short-term and long-term strategies.

 - #ChatGPT

 

I am reluctant on foreign investments

Foreign investment can certainly play a role in promoting economic growth and reducing poverty, but it's important to be aware of the potential downsides as well. Some of the concerns that may make you reluctant to rely on foreign investment include:

1. Dependence: Over-reliance on foreign investment can make a country vulnerable to economic and political changes in other countries, and could result in a lack of control over important economic decisions.
2. Unbalanced development: Foreign investment can sometimes be focused in specific sectors or regions, leading to unbalanced development and exacerbating existing inequalities.
3. Environmental degradation: Some foreign investment projects, particularly in extractive industries, can have negative impacts on the environment and local communities.
4. Job displacement: Foreign investment can sometimes lead to job displacement for local workers, particularly if companies import labor from other countries.

Despite these potential challenges, foreign investment can still play a role in promoting economic growth and reducing poverty, particularly in countries that lack the resources or expertise to undertake certain types of investment themselves. In order to maximize the benefits and minimize the risks, it's important for governments to engage in active policymaking and regulation of foreign investment, including measures such as:

1. Encouraging investment in sectors that have the greatest potential for growth and job creation.
2. Implementing labor and environmental standards to protect local workers and the environment.
3. Encouraging investment in partnerships with local firms to help transfer technology and skills.
4. Developing institutions and regulations to ensure that foreign investment benefits the local economy and society as a whole.

- #ChatGPT 

 I think technology and skill transfer can be achieved by encouraging international education and work opportunities

Yes, encouraging international education and work opportunities can indeed be a powerful tool for promoting technology transfer and skill development. When students and workers have the opportunity to study or work abroad, they can learn about new technologies, business practices, and approaches to problem-solving. This knowledge and experience can then be brought back to their home country, helping to spur innovation and development.

International education can also help to foster cultural exchange and promote mutual understanding, which can be important for building strong partnerships and relationships between countries. Additionally, by studying or working abroad, individuals can develop a global network of contacts and professional relationships that can be valuable in the future.

However, it's important to ensure that international education and work opportunities are accessible to a broad range of individuals, and not just a privileged few. This can involve providing scholarships, language support, and other resources to help individuals overcome any financial, linguistic, or cultural barriers they may face. Additionally, it's important to ensure that these opportunities are designed and implemented in a way that is equitable and sustainable, taking into account the needs and perspectives of all stakeholders.

- #ChatGPT 

 Personally, I have seen how vulnerable Malawi has become and I find the further invitation of foreign investors not a welcome thing at the moment. I am proposing encouraging Malawians to work and/or study abroad as a way that Malawi can gain on sharing of technology and skills. This ChatGPT agrees and further suggests the introduction of scholarships for the inclusion of the less privileged. 

The partnership between local academic institutions and foreign institutions is another way to share skills and technology. We must try and get out of poverty really.

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.

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."

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.