Malawi's government begrudgingly unveiled its currency devaluation scheme this month, aimed at getting inflation under control and its fiscal health back on track, but the risky move comes as the country faces political unrest, according to dpa. After 19 people were killed in July in protests against the scarcity of basic commodities and rising unemployment, President Bingu wa Mutharika issued a stern warning to civil society groups who were thinking of holding another round of demonstrations. "The government will find you, wherever you are hiding," he said on state television. Protesters soon called off their plans and allowed UN mediators to step in this week, in an effort to bridge the political gap. But the political and economic concerns remained. The cost of bread immediately soared after central bank chief Perks Ligoya announced the currency plans. "Basically, it is to do with the devaluation of the kwacha as well as rising transport costs," said Mahesh Josyabhatla, chief executive officer of Bakhresa Grain and Milling, one of the leading suppliers of bread flour. The government hopes the fiscal move will help bring back a stalled International Monetary Fund programme of assistance the country desperately needs, although a lack of faith in the government's fiscal competence has hampered these efforts. Even in these trying times, mixed messages to the world are still common, as Malawi continues to alienate its friends and loses their financial support. While the president once said he would only devalue if the IMF offered a cushion to control price fluxes - which has yet to come - his central bank governor insisted knocking 10 per cent off the kwacha was entirely unrelated to the international institution. Social economists warned that being a net importer of goods, the country's poor, who are the vast majority in the population of 15.6 million, stand to suffer the most from the currency's decline. Some 75 per cent of the population live on less than a dollar a day and HIV/AIDS continues to harshly affect the nation's prospects. While improving in the last decade, Malawi remains heavily dependent on food aid. Domestic agricultural land, a prime natural resource, struggles to bear the burden of a growing population. The main export crop, tobacco, is facing a bad harvest this year, adding to existing foreign currency shortages and putting more pressure on the government to ease controls on the kwacha, which was pegged to the dollar. "Theoretically, it goes without saying that devaluation of a country's currency raises the prices of imports and makes its exports more affordable in world markets. But what will actually happen to our imports and exports is difficult to give a precise answer to," said economic commentator Desmond Dudwa Phiri. Manufacturing exports are few, and they too depend on imported raw materials, lessening the advantages they could gain from a cheaper kwacha. Also, they must now deposit their foreign exchange in banks, as part of the overall forex crunch. Critically, international donors can no longer be relied on to cover the gaps in food supplies, with European governments increasingly voicing their dissatisfaction with Mutharika's human rights record and fiscal management. The foreign aid, making up about a third of government spending, is shrinking. London indefinitely suspended its large budget support worth 550 million dollars to Lilangwe last month, over a diplomatic row, just before the deadly protests which only sparked further scrutiny. The protesters came out amid concerns the president - a former World Bank economist now in his second term at Malawi's helm - was failing the economy while cracking down on a fledgling opposition, in a stark reminder of the dismal days of one-party rule. In another blow, the IMF has said government's projection of 6.9 per cent growth this year was "optimistic," as the country's infrastructure was in shambles. Central bank governor Ligoya tried to calm the restless underclass, saying negative effects of the kwacha's devaluation would be eclipsed by the upsides gained from good monetary and fiscal policies. He also pledged to crack down on traders who raised prices. But observers, like the Centre for Social Concern (CFSC) in Lilongwe, fear the gap between meager incomes and rising daily expenses. "It is important to recognize that the high cost of living without tangible coping mechanisms and commensurate rise in household incomes will force households to choose between basic necessities, especially the urban poor," said the CFSC. When people are anyway spending much of their income on food, further belt tightening, the CFSC warned, "may lead to long term adverse effects on the nation as a result of inadequate food intake."
