‘Serious manufacturing can seriously send a nation to the next level as evidenced by Israel’s economic revolution’—economic expert Thomas Ngoma

Malawi’s vision moving at slow pace

* Israel GDP stands at US$564 billion with agriculture contributing US$1.1 billion to the total GDP

* The concept of Israel’s economic recovery plan (ERP) has elements Malawi can benefit from

* Central Banks must never finance government deficit; it is the killer of many economies — avoid it

By Duncan Mlanjira

Serious manufacturing can really send a nation to the next level as evidenced by Israel’s economic revolution’, contends Thomas Ngoma — Malawian executive economic management consultant based in the UK in relation to the economic challenges the country is currently experiencing.

Ngoma has over 35 years of experience advising clients on strategic business transformation both in public and private sector regulated environments and he says for many years, he was based in Israel as an expatriate advisor.

“Probably Israel is not a topic with some readers for that. I apologise for bringing it up [but] I am purely interested in its economic and industrial innovations.

“The Bank of Israel (BOI) was founded in 1954 with a stated goal of price stability, but more importantly, the government wanted it to spearhead its industrialisation leap by providing low interest loans to priority manufacturing sectors.

“These low-interest rate loans did wonders to stimulate rapid economic growth and development. As a result of strong manufacturing, agriculture boomed to provide food for the growing middle class and later exported worldwide. 

“Today, Israel gross domestic product (GDP) stands at US$564 billion with agriculture contributing US$1.1 billion to the total GDP. From this, I learned that wow! manufacturing can really send a nation to the next level.”

“But a monetary crisis happened in 1984. Despite all efforts by the banks to keep inflation low, it was over 500% instead. I have never lived in a country that follows consumer price index (CPI), like football, as Israel.

“This is because during high inflation, wages, pensions, financial assets, etc, were all indexed to inflation in order to safeguard the purchasing power of citizens. I won’t go into too many details into inflation index modelling developed to provide the cost of living adjustment (COLA).

“What caused this hyperinflation? The main offenders have been analysed as follows:

1. Bank of Israel (BOI) printed too much money to support government fiscal deficit;

2. The government had run high budget deficits consistently high for many years; and

3. The currency devalued by a lot from 33.65 Israel shekels to 1,500 to the US$.

How did they fix this:

1. Passed a law that BOI must never finance government deficit;

2. Developed an economic recovery plan (ERP) that really worked;

3. They deployed the indexation mechanism;

4. They received a big aid grant from the US of $748 million per year for 2 years;

5.  Introduced a new currency that chopped off 3 zeros. 1 new Israel shekel was equal to 1,000 old shekels;

6. They fixed the shekels to the US$; and

7. Made BOI independent from political pressures.

“Today, inflation is at 3.2%,” says Ngoma, adding that although Israel had well trained engineers, economists, and financiers, they turned to external advisors for help.

Ngoma added a strong advice that a country’s Central Bank, like the Reserve Bank of Malawi (RBM), “must never finance government deficit as it is the killer of many economies — avoid it”.

“The concept outlined in their economic recovery plan has elements Malawi can benefit from” such as: RBM stopping monetising government deficit and limiting money supply growth; fixing the Kwacha exchange rate; lowering inflation rate to single digit 2%; lowering interest rates to businesses, especially SMEs and, among others, receive a substantial amount of forex injection.

“These actions will stabilise the Kwacha and the economy to invest in productive sectors,” he continues. “Although there are many ways to achieve the above the reason, I advocate for cost-benefit analysis (CBA) because it is an economic package that bundles all the above items.

“It will inject a substantial forex into Malawi and financial discipline. Implementing CBA, for example, does not preclude government borrowing — it is about where does the government borrow from? It must not borrow from the central bank.

“That is what all successful nations have realised and have passed laws against it to prevent discretionary temptations.”

Ngoma explained that there are two types of borrowing — “one is for monetary policy purposes, eg, from the IMF or other countries. The other is government borrowing for fiscal purposes.

“Israel got around this issue by borrowing/receiving a grant of the $1.5 billion from the US for monetary policy purposes to fix the currency against the dollar. CBA addresses this need.

“For fiscal borrowing, they issued new government bonds in the US and Canada to raise billions to invest in the industrialisation of the productive sector.

“For Malawi, this means issuing eurobonds to raise dollars for government fiscal spend of, say, US$27 billion. This is a fiscal issue, not a monetary issue to be addressed by CBA,” said Ngoma.

In his analysis of the Malawi economy, Don Consultancy Group Chief Economist Chifipa Mhango maintained that Malawi Congress Party (MCP) Government “is facing fiscal consolidation challenges in managing the economy, with import cover, a key forex position indicator also reaching very stressful levels, at 0.5 months or 15 days import cover, among the lowest in years”.

He quoted latest data gathered through the RBM and raised further concern that — as indicated in his previous statements, “Malawi faces a challenging monetary policy environment, with the bank policy lending rates from the RBM rising from 12% in September 2021 to current levels of 26% [whose] overall inflation rate surging from 8.9% to current 34.3%, and food inflation rate from 10.9% to current 43.5% during the same period”.

“The country’s international trading position shows a worsening prolonged international trade deficit position, from MK1.4 trillion in 2020 to MK2.5 trillion.

“In 2023, the country exported MK1.1 trillion worth of goods but imported more than three times, almost MK3.7 trillion, and this international trade deficit continued into the first eight months of 2024 to August, with MK227.9 billion in the last month, as reflected in the RBM data.

“The above openly defies the current MCP Government’s Kwacha devaluations that have been implemented with a motivation to boost exports or improve international trade position.

“Under these conditions, it means Malawi economy’s ability to accumulate enough foreign exchange reserves through international trade continues to be eroded, as the country trade position continues to be skewed towards importing than exporting — thus cementing the position that the country is officially an import consuming economy.”

He further said as per latest data reported by the RBM, Malawi’s total foreign exchange reserves position “has suffered terribly, which as of August 2024 stands at MK941.4 billion and reducing the country’s ability to import crucial products such as fuel and fertilizer — as that level implies a 0.5 months or 15 days import cover”.

He expressed a serious concern that the economic policy tool of currency devaluations “is not serving the purpose of boosting exports due to a weak production base and uncompetitive products, with less value addition, but rather devaluations are done to influence forex demand in the market”.

“With the growing need for foreign currency, and the country reaching stressful levels of import cover of 15 days or 0.5 months, the only option on the table under the prevailing tough economic environment as articulated above would be further devaluation of the Malawi Kwacha soon,” he said.