It is everyone's knowledge that inflation, which is the general rise in the prices of goods and services, has been on the rise since the devaluation and depreciation of the Kwacha, driven mostly by the prices of food items and movements in the exchange rate, as shown in the figure below. In November 2012 this rate stood at 33.3 percent.
Historically Malawi's inflation was designed to measure the welfare of people with respect to fluctuation in the price of food. If the price of food is stable and therefore inflation is low, then the residents in Malawi are enjoying a good standard of life.
On the other hand, if the price of food is rising, and therefore inflation is on the up, as it is doing now, then the residents' standard of living is deteriorating. This presumption may no longer hold.
There are a number of items residents consider essentials nowadays, such as mortgage repayments, televisions, radio systems, among others. Whilst some of them are considered in the present formula for calculating inflation, the weight given to them needs to be elevated, i.e. they need to account for a larger percentage of the sample using for calculating inflation.
Otherwise the current formula is misleading and may no longer be a suitable indicator of the state of the living standard of residents.
A more interesting observation however is that an increase in prices of food should ordinarily work to the advantage of workhorses who produce the food itself – farmers. If farmers benefit from high prices, they will have incentives to produce more food the following year. Is there anything wrong in encouraging more production by giving farmers better prices?
Perhaps not. Even in the case where middlemen are involved, farmers are likely to get a slice of the price increase the following year.
Unfortunately opponents of the reforms do not view things that way. All they want are lower prices for consumers, at whatever cost. To them it is the concerns of the consumers that matter, not the concerns of the producers!
This is a fallacy which actually goes against the country's pivotal objective of turning Malawi from a consuming and importing nation into a producing and exporting, which the opponents agree with. In Malawi it does appear that consumers are more important than producers. As such consumers should be subsidized while producers should be driven onto the margins.
There seems to be so much buyer power and much less seller power because of the advantage of having a podium from which to speak. But policies or measures that run counter to producers/farmers benefiting from the price increases lead to reduced production. This defeats the objective of Malawi becoming a producing and exporting nation. For Malawi to move ahead production needs to be encouraged and farmers must be equally rewarded with the market price, not a distorted price.
The spirit of favouring consumers, mostly urban dwellers is known as urban bias and has its origin in government policies. Since urban dwellers have a platform from which to speak and can therefore easily attract a following, government has always favoured them at the expense of producers/farmers who literally have no voice.
Export bans for example, reduce the market for a farmer and therefore lower the price for his or her produce as there is little competition in the domestic market. The lower prices favour domestic consumers, not producers, and have the effect of discouraging the producers or farmers from producing more the following year.
In fact not many potential famers go into the business of farming because of the uncertainty surrounding export bans. Farmers have in the past failed to obtain supply contracts from other countries because they are not sure whether there will be an export ban on the particular commodity they want to grow. This creates economic inefficiency as the nation's resources are not fully utilized.
When farmers grow less maize because prices are not attractive, the following year is typified by shortages of maize, which leads to price increases and therefore inflation.
The late Bingu Wa Mutharika's (May His Soul Rest in Peace) Government started very well by freeing exports of almost everything. The country then witnessed a boom in agriculture production, not only because of the Farm Input Subsidy Product given to smallholder farmers, but also because other individuals grew maize commercially.
Enter the price controls (remember the minimum and maximum prices?) and export bans, then production plunged despite the continuation of the farm input subsidy program, a clear illustration that commercial farmers were discouraged from continuing to grow maize.
Within the framework of the Economic Recovery Program therefore, the new administration should refrain from copying destructive policies such as unwarranted export bans except in emergency cases. Export bans are a form of protection of domestic consumers, and protection in whatever form is bad as it leads to laziness of the beneficiaries and exploitation of the producers.
Another myth emanating from anti-reformists is that they are promoting a recipe for destruction of this economy. Every time the value of the kwacha is tampered with, for example fixing its value against currencies of Malawi's major trading partners has been followed by utter misery for all citizens of Malawi.
Everyone is aware that fixing the rate of kwacha is the root cause of all the woes that this country is passing through now and therefore reversing the reform agenda is actually tantamount to creating further problems and prolonging the recovery period of the economy.
Reforms are always difficult to pass through, just like any change. Look at the calls for the Israelites to Moses to return to Egypt instead of proceeding to the Promised Land of milk and honey.
The reforms are necessary for recovery, for what they are doing is to reverse the bad policies of the past. In fact the kwacha has already shown signs of stabilization as a direct result of increases in interest rates triggered by increases in the discount (bank) rate.
Whilst everyone, including industry and commerce, would want cheaper money, it was that cheaper money that kept putting a lot of pressure on the foreign currencies. Now that interest rates are high and apparently the discount window is closed, the pressure on foreign exchange to continue appreciating should subside. Inflationary pressure emanating from exchange rate depreciation should thus be under control.
In conclusion, the reforms that opponents are against are actually the necessary cure for this country. So far the reforms have already brought fuel back to filling stations and foreign exchange is back.
As a matter of fact reliable sources indicate that the demand for fuel has already dropped from a high of US$30 million per month when fuel prices were artificially controlled to about US$23 million per month now due the automatic pricing mechanism, another reform measure.
This is an important efficiency measure of the reforms. One now cannot just decide to drive out without a justification! In addition government is not going creating another liability to oil importers. Remember that government owes about K24 billion (the amount may be slightly lower now) because of accumulation of shortfalls arising from controlled fuel prices.