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.
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