Tuesday, December 10, 2013

Exchange Rates

Since I am paid by deposit to our account in the US in dollars, getting Malawian Kwacha (MK) for our daily expenses always involves some kind of exchange. Whether exchanging US bills on the “black market”, getting MK from the ATM, or cashing a check at the US Embassy, we are always exchanging money, and (pretty much) always losing something in the process (how much one looses is hard to tell, but the banks seem to take at least 4%, and transaction costs can be as high as 10%). Apart from the US Embassy, which provides exchange services as a courtesy for Embassy staff and pseudo staff (like Fulbrighters), every other service for exchanging money is out to make a percentage on the process.

Today the Malawi kwacha is trading at 412 to the US dollar (second black arrow on graph below), so $100 buys you 41,200 MK. When we arrived, it was trading at around 325 (first black arrow on graph below), so $100 was only worth 32,500. So this isn’t all bad for us – our dollars go farther. But of course since many goods are imported (or their production depends on imported materials), their prices reflect the exchange rate, so the devaluation from 325 to 412 means that for many goods prices have (or will) increase substantially.

Image from here, annotations mine.

It also means a real loss of value in assets. For example, in August we bought a car for 2.2 million MK. This translated to a cost of about $6,800. Four and a half months and 6,000 km later, we have to sell this car. Even if we sell if for the same price we paid for it, 2.2 million, it has lost value, since that 2.2 million is now only worth $5,500. This drives home the point that these changes in exchange rates have real consequences for people. Imagine if this was not a car but your savings account!

Many Malawians have referred to the economic crisis of last year. That was a large devaluation of the kwacha – over a short period time the kwacha went from about 160 to around 270 (yellow box on graph). This must have been a very difficult time. The real value of savings accounts declined by 40%. But it seems the crisis continues since the kwacha is now at about 412 – a decline of over 60% from 2 years ago.

I’m not sure how I would here deal with this reality, but I think it may explain why building seems to be the most popular thing to do with money – buildings may not appreciate much, but they probably won’t lose value very fast either.

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