Devaluation in Malawi

Topics: Currency, Central bank, International economics Pages: 6 (1870 words) Published: August 19, 2012
Devaluation occurs when the price of one currency is officially decreased against other currencies. Devaluation takes place in a fixed exchange system based on government policy decisions (Tembo 2012). Recently, the government of Malawi through the Reserve Bank of Malawi (RBM) has devalued the Malawi Kwacha by 49% and untied the currency from the dollar. The Reserve Bank of Malawi devalued the Malawi Kwacha exchange rate from K168 to K250 per United States dollar. This was done to meet the demand of the International Monetary Fund which has been refused for some time.

2.0 Devaluation trend in Malawi
In 1967, Malawi experienced the first devaluation of 14% which was implemented on the British pound since the currencies for the two economies were at par. Between 1973 and 1975, the RBM started pursuing an active exchange rate policy which involved devaluation of the Malawi Kwacha when a need arose (Tembo 2012). Since the establishment of an active exchange rate, the Malawi kwacha lost value again in 1982 by 15%. Devaluation has also been happening in the past years up to date. Devaluation trend in Malawi starting from 1988 is depicted in table 1 in the appendix.

3.0 What triggered devaluation
3.1Few forex reserves inflows to finance imports
The country's long standing foreign exchange problems intensified in 2011 because of lower tobacco export earnings and cuts in external aid as several donors reduced their financial support to Malawi when the authorities' IMF-supported program went off track in the first half of 2011 and because of human rights and governance concerns (IMF 2012). This pushed Malawi towards financial collapse. 3.2Trade deficit

In Malawi, the value of imports is more than value of exports. This means that the amount of goods imported from outside exceeds the amount of goods we export hence making Malawi a net importer. This can be due to the fact that our locally produced goods seem to be expensive on the international market thereby making foreign countries less willing to import more.

In order to improve foreign exchange shortages, trade deficits and to woo back international donors, the government decided to devalue its currency. According to Reserve Bank of Malawi statement (2012), governor Charles Chuka said that the move was intended not only to improve the availability of foreign exchange and unlock donor flows, but also to reduce demand for imported consumer goods in favour of domestically produced goods.

4.0 Reactions of the general public
The response by Malawians, however, has been mixed. Some people seeme to be positive about devaluation while others are crying foul. 4.1 Reason for negative reactions
4.1.1 Leads to inflation
Devaluation leads to inflation especially on goods that use imported raw materials and as well as due to transportation cost (rising cost of fuel) (Tembo 2012). Most Malawians complained about devaluation; although the prices of goods and services have risen up, wages or income for most of them remains constant. Furthermore, importers, have tended to suffer and, with inflation rocketing, the prices of imported goods and services have also significantly risen. The Chief Executive of the Consumer Association of Malawi, John Kapito, pointed out that Malawi is a landlocked country and heavily dependent on imports, so any weakness in the kwacha was bound to have negative consequences for consumers (IRIN 2012). The graph in the appendix depicts the inflation trend between April,2011 and April 2012. Since the purchasing power is usually reduced due to inflation, most Malawians have shown their anger after devaluation through strikes since their incomes have remained the same. The devaluation of the kwacha by 49 percent in May and the general hard economic environment have sparked a spate of strikes in companies and institutions which aimed at an increment in peoples income. An analysis by the Daily Times shows that most of the strikes...
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