Shortly after taking office last year, President Joyce Banda gave up on the Malawian Kwacha’s fixed peg against the dollar. Since then the exchange rate has evidently been some kind of managed float, meaning the rates are set in international markets. The unchallenged conventional wisdom is that this has drastically increased inflation in the country.* This piece in the Nyasa Times is a great example – it mentions, in passing, that “Soaring food and fuel prices have been stoking inflation since President Joyce Banda eased the kwacha’s peg against the dollar and devalued the currency by 49 percent.” Even people who support the reforms tend to concede that they have come at a large cost.
The issue is that there’s basically no way this claim is true. To oversimplify a good deal, Malawi is an agrarian society with a CPI basket (used to compute inflation rates) dominated by food. Imports are a pretty trivial share of food consumption, but food price inflation has been running at nearly the same rate as the overall rate. How can costlier imports (that is, a devalued Kwacha) be leading to price rises, when most of the rise in prices is non-imported food? The answer is they almost certainly cannot.
In case that didn’t convince you, here are some basic calculations. Malawi’s GDP was $14.265 billion in 2012, and about 30% of that was agriculture. That means the value of domestic agricultural production was $4.280 billion. Summing up all the food categories on indexMundi’s import breakdown for the country for 2011, I get $0.311 billion, meaning imports were 7% of all food; non-imported food was $3.968 billion. Food prices rose by ~30% year-on-year in February 2013 according to Malawi’s NSO. The exchange rate change is just a one-off rise in the price of imports. That was a drop of 49%, so we have 4.280*1.3=0.311*1.49 + 3.968*i, where i is the non-import (domestic) inflation rate. Solving for i gives us a blistering domestic inflation rate of 29% – imports are barely a drop in the ocean. What if we use the entire 142% decline in the exchange rate against the dollar since Banda took office? We still get a domestic inflation rate of 21%
Now, there are models in which the exchange rate might pass through to the broader economy and raise domestic inflation, but even a sophisticated approach would have to confront the basic fact that most Malawians are farmers who eat very little that is imported. And this is leaving aside the fact that when the currency peg was in place, a substantial share of imports were bought using black-market forex, and my skepticism that the basic inflation numbers are even correct. If we take the data at face value, it is pretty hard to justify the claim that the devaluation of the Kwacha is responsible for Malawi’s high inflation.