Saturday, August 26, 2023

The Cornerstones of Democratic Governance: Trust, Transparency, and Informed Choices in Malawi

Democracy, a governance system heralded for its emphasis on collective decision-making, finds its strength in the foundational belief that state power is derived from, and maintained by, the will of the people. This principle holds true universally, but when contextualized for a nation like Malawi, it becomes crucial to examine the mechanisms that ensure its vibrant democratic fabric remains intact.

The Authority of State Power

The essence of democratic governance lies in the fundamental understanding that the authority to govern originates from the people. Governments, in this construct, are custodians of power, not absolute rulers. They serve at the pleasure of the populace, ensuring that the nation's policies and initiatives align with the collective will of its citizens. In the context of Malawi, this interplay becomes even more poignant. As a nation that has experienced its share of political and economic challenges, Malawi's democratic resilience depends heavily on the symbiotic relationship between the government and its people.

Trust: A Continuous Endeavour

While the installation of a government may signal an initial trust placed by the voters, maintaining this trust is an ongoing endeavour. A government's mandate isn't just about gaining power but about continually validating the reasons they were chosen. The trust of the Malawian people is not a static commodity; it's dynamic and reflective of the government's actions, decisions, and integrity.

Transparency, Openness, and Accountability

A democracy's health is often gauged by how open, transparent, and accountable its government is. 

- Transparency in government ensures that its workings are clear, its decisions can be scrutinized, and its processes are easily understandable. For Malawians, transparency provides a window into the workings of the state, assuring them that their interests are being safeguarded.

- Openness promotes a culture where the government doesn't just communicate its decisions but also encourages feedback. It fosters an environment where dialogue between the people and the government is regular, robust, and constructive.

- Accountability ensures that those in power remain answerable to the public. It provides mechanisms to redress grievances, ensuring that misuse of power or deviations from the promised path are corrected promptly.

The Imperative of Informed Democratic Choices

For a democracy to function optimally, an informed electorate is crucial. Malawians, like any democratic citizenry, need access to accurate, timely, and relevant information. An informed populace ensures that political and governmental decisions are not just reactions but are based on a deep understanding of the implications. It fosters a culture where choices, whether during elections or public consultations, are made after careful deliberation.


The people of Malawi, in their democratic journey, have entrusted their government with the responsibility of shaping the nation's future. This trust, conditioned on transparency, accountability, and informed decision-making, underscores the tenets of good governance. For Malawi, as with any democracy, these principles are not just guidelines but essential prerequisites for a flourishing and cohesive nation.


OpenAI. (2023). ChatGPT (August 3 Version) [Large language model].

Tuesday, August 01, 2023

Currency Depreciation and Inflation: The Vicious Cycle

 For a long time, I have suspected the existence of a vicious cycle between inflation and currency depreciation. I had to find some clarity on how this is:

  1. Currency depreciation: This refers to a fall in the value of a country's currency relative to one or more foreign currencies. This often happens due to market forces in a floating exchange rate system.
  2. Inflation: This is the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling.

Now, let's explore the interrelated effects.

The effect of currency depreciation on inflation:

Currency depreciation can lead to higher inflation. Here's why:

  • Imported inflation: When a currency depreciates, the prices of imported goods and services rise because it takes more of the home currency to purchase the same quantity of foreign currency. This can lead to an overall increase in the price level, causing inflation.
  • Demand-pull inflation: A weaker currency can make a country's exports more competitive (cheaper for foreigners). This can lead to an increase in demand for the country's goods and services, and if the demand outstrips supply, it can lead to higher prices and thus inflation.
  • Cost-push inflation: Companies that rely on imported materials for their production might face higher costs due to a depreciated currency, and they might pass these costs onto consumers, again leading to inflation.

The effect of inflation on currency depreciation:

Inflation can also lead to currency depreciation. Here's how:

  • Eroding purchasing power: If a country has a high inflation rate relative to other countries, its purchasing power falls. This means that you can buy less with the same amount of that currency. As a result, demand for that currency may decrease on foreign exchange markets, leading to its depreciation.
  • Interest rates and foreign investment: Central banks often increase interest rates to combat high inflation. While this might attract foreign investors seeking higher returns, in some cases, high inflation could discourage foreign investment due to uncertainty and perceived economic instability. If foreign investors withdraw or avoid investing, they sell the home currency, contributing to its depreciation.

Sunday, June 18, 2023

Resolving High Inflation

I have observed that the government is implementing monetary and fiscal decisions in an effort to reduce high inflation. However, despite these measures being applied for several years, there has been no significant change in the inflation rate. It is important to understand that inflation is influenced by various factors, and each factor requires a specific remedy. Therefore, I have compiled a list of several factors contributing to high inflation and their corresponding remedies:

1. Increase in Money Supply: 

  • When there is an excessive increase in the money supply in an economy, it can lead to high inflation. This can happen through various means such as central bank policies, government deficit spending, or excessive credit creation by commercial banks.
  • Remedy for high inflation due to increase in money supply:
    • Implement tight monetary policy by the central bank, such as raising interest rates or reducing the availability of credit.
    • Strengthen banking regulations to control excessive credit creation.
    • Improve transparency and accountability in monetary policy decisions.

2. Demand-Pull Inflation: 

  • High inflation can occur when there is a significant increase in aggregate demand for goods and services in an economy, surpassing the available supply. This can happen due to factors like increased consumer spending, investment, or government expenditure.
  • Remedy for demand-pull inflation:
    • Implement contractionary fiscal policies, such as reducing government spending or increasing taxes, to reduce aggregate demand.
    • Use monetary policy tools, like increasing interest rates, to curb excessive borrowing and spending.
    • Encourage savings and investment to divert funds from consumption.

3. Cost-Push Inflation: 

  • When there is a rise in production costs, such as labor, raw materials, or energy prices, it can lead to cost-push inflation. Businesses may pass on these increased costs to consumers through higher prices, resulting in inflationary pressures.
  • Remedy for cost-push inflation:
    • Address underlying factors contributing to cost increases, such as labor market reforms or reducing trade barriers for essential inputs.
    • Promote competition to keep prices in check and prevent businesses from passing on all cost increases to consumers.
    • Provide targeted subsidies or tax breaks to industries facing significant cost pressures.

4. Imported Inflation: 

  • If a country heavily relies on imports and the value of its currency depreciates, the cost of imported goods and raw materials can rise. This increase in import prices can contribute to inflation.
  • Remedy for imported inflation:
    • Focus on stabilizing the exchange rate through appropriate monetary and fiscal policies.
    • Promote domestic production and reduce reliance on imports through industrial development initiatives.
    • Diversify import sources to mitigate the impact of currency fluctuations.

5. Exchange Rate Fluctuations: 

  • When a country's currency depreciates in relation to other currencies, it can lead to higher inflation. This is because it becomes more expensive to import goods and services, and prices of imported goods tend to rise.
  • Remedy for high inflation due to exchange rate fluctuations:
    • Use appropriate monetary policy measures to stabilize the currency.
    • Build foreign exchange reserves to intervene in the market when necessary.
    • Implement structural reforms to enhance competitiveness and reduce reliance on imports.

6. Inflation Expectations: 

  • If people expect prices to rise in the future, they may adjust their behavior by demanding higher wages or increasing prices for goods and services. These expectations can become self-fulfilling, driving up inflation.
  • Remedy for high inflation due to inflation expectations:
    • Communicate clear and credible monetary policy objectives and strategies to manage inflation expectations effectively.
    • Maintain price stability as a primary goal of monetary policy.
    • Use forward guidance to signal future policy actions and manage inflation expectations.
    • Strengthen central bank independence to maintain confidence in monetary policy decisions.
    • Monitor and manage inflation expectations through surveys and public outreach programs.

7. Supply Chain Disruptions: 

  • Disruptions in the supply chain, such as natural disasters, conflicts, or trade restrictions, can lead to shortages of goods and services. When supply falls short of demand, prices tend to rise, causing inflationary pressures.
  • Remedy for high inflation due to supply chain disruptions:
    • Enhance disaster preparedness and risk management strategies.
    • Diversify supply sources and develop local production capabilities.
    • Improve infrastructure and logistics to ensure smooth supply chain operations.

8. Government Policies and Regulations: 

  • Government policies, such as excessive taxation or regulations that hinder competition, can increase production costs and limit supply, leading to inflationary pressures.
  • Remedy for high inflation due government policy and regulations:
    • Evaluate and streamline regulations that hinder competition and increase production costs.
    • Implement pro-growth policies, such as tax reforms and investment incentives, to stimulate supply and increase productivity.
    • Enhance transparency and efficiency in government spending to reduce fiscal deficits.

9. Speculative Activities: 

  • Speculative bubbles in asset markets, such as real estate or stocks, can lead to an increase in prices beyond their fundamental value. When these bubbles burst, it can cause significant economic disruptions and inflationary effects.
  • Remedy for high inflation due to speculative activities:
    • Implement effective financial regulations and supervision to detect and prevent asset bubbles.
    • Enhance market transparency and improve investor education to discourage excessive speculation.
    • Use macroprudential measures, such as higher margin requirements or loan-to-value ratios, to curb speculative activities in asset markets.
Identifying the exact cause of the current high inflation requires a thorough analysis of the specific economic conditions. Once the root cause is determined, the appropriate remedy can be applied to achieve lower inflation. It is essential for policymakers to carefully assess the situation and implement targeted measures accordingly.

Thursday, June 08, 2023

Aligning Exchange Rates to Economic Fundamentals

In this blog post(AI generated), I will discuss how to align the exchange rate to economic fundamentals without devaluation or adopting a flexible exchange rate regime. This is a challenging task for many countries that face external imbalances, inflationary pressures, or financial instability.

The exchange rate is the price of one currency in terms of another. It reflects the relative demand and supply of different currencies in the global market. Economic fundamentals are the underlying factors that determine the equilibrium exchange rate, such as productivity, trade balance, fiscal policy, inflation, and interest rates.

One approach to align the exchange rate to economic fundamentals is to use the Fundamental Equilibrium Exchange Rate (FEER) method. This method involves calculating the real exchange rate that equates the current account at full employment with sustainable net capital flows. The FEER is the exchange rate that would prevail if the economy were operating at its potential output and external balance. If the actual exchange rate deviates from the FEER, it implies that the currency is overvalued or undervalued.

To explain the FEER method more, let me use an example. Suppose a country has a current account deficit of 5% of GDP and a potential output growth of 3%. The FEER method would estimate the real exchange rate that would reduce the current account deficit to a sustainable level, say 2% of GDP, given the potential output growth. This would require a depreciation of the real exchange rate to make the country's exports more competitive and imports more expensive. The FEER method would also take into account the net capital flows that are consistent with the desired current account balance and the intertemporal budget constraint of the country.

Another approach to align the exchange rate to economic fundamentals is to use the Behavioral Equilibrium Exchange Rate (BEER) method. This method involves estimating a reduced-form equation that relates the real exchange rate to a set of explanatory variables that capture the economic fundamentals. The BEER is the exchange rate that is consistent with the observed behavior of agents in the economy. If the actual exchange rate deviates from the BEER, it implies that there are temporary shocks or market imperfections that distort the exchange rate.

To explain the BEER method more, let me use an example. Suppose a country has a real exchange rate of 1.2 and a set of economic fundamentals such as productivity, trade balance, fiscal policy, inflation, and interest rates. The BEER method would estimate a regression equation that relates the real exchange rate to these variables using historical data. The equation would have a constant term and coefficients for each variable that measure their impact on the real exchange rate. The BEER method would then plug in the current values of these variables into the equation and obtain a predicted value for the real exchange rate, say 1.1. This would indicate that the actual exchange rate is overvalued by 0.1 compared to the BEER.

Both methods have advantages and disadvantages. The FEER method is normative and prescriptive, as it reflects what the exchange rate should be rather than what it is. The BEER method is positive and descriptive, as it reflects what the exchange rate is rather than what it should be. The FEER method requires more assumptions and judgments about the potential output and sustainable net capital flows. The BEER method requires more data and econometric techniques to estimate the equation.

To align the exchange rate to economic fundamentals without devaluation or adopting a flexible exchange rate regime, a country needs to adjust its macroeconomic policies and structural reforms to influence the demand and supply of its currency. For example, a country with an overvalued currency can reduce its fiscal deficit, increase its domestic savings, promote its exports, diversify its production structure, and liberalize its capital account to increase the demand for its currency and reduce its supply. A country with an undervalued currency can increase its fiscal spending, reduce its domestic savings, stimulate its imports, upgrade its technology level, and regulate its capital account to reduce the demand for its currency and increase its supply.

Aligning the exchange rate to economic fundamentals without devaluation or adopting a flexible exchange rate regime is not easy or quick. It requires coordination and consistency among different policy instruments and objectives. It also depends on the external environment and the reactions of other countries. However, it can help a country achieve a more stable and sustainable macroeconomic performance in the long run.

Thursday, June 01, 2023

On Forex Mismatch

I want to share my thoughts on the article “Forex mismatch widens year after devaluation” published on the Nation website on 30th May 2023.

The article reports that there is a huge gap of K514 between the official exchange rate of the kwacha and the bank rate, especially the cash rate. I would like to suggest that this gap cannot be solved by devaluation because it is not caused by demand but by the costs and profits for the banks and parallel market forex traders. This is what one of them told me when I asked about the reason for the gap. Our policymakers need to understand this, otherwise, they will keep devaluing the kwacha but never achieve a narrow gap.

When economists see that demand is high, they usually increase the commodity's price. In the case of currencies, increasing the price means devaluing the currency.

But let's compare this to goods in a wholesale and retail setting. When the wholesale price goes up, the retail price also goes up because the retailer wants to keep his profit margin and cover his costs.

In the case of forex trade, the Reserve Bank rate is like the wholesale price and the bank rate is like the retail price. The gap, which is due to costs and profits, cannot be reduced by devaluing the currency more. If the Reserve Bank wants to reduce this gap, it has to limit the profit margin that the banks and parallel market can make from forex trade.

So, in my opinion, the gap of K514 mentioned in the article can be reduced not by further devaluation, but by regulating the profit margin of the banks and parallel market.