Currency Trouble in Malawi

Introduction

Malawi is one of the most complex economies in the world. Being one of the poorest countries in the world, the government has to rely majorly on the aid of international organizations from countries such as the United States and the United Kingdom. These two were the major players in this Malawian Industry. By 2011, half of the country’s annual budget was being financed through foreign aid. The top exports of this country include raw tobacco, dried legumes, raw sugar, and raw cotton. Therefore, it is evident that the economy of this country is mainly dependent on Agriculture. This supports over 80% of its population. Manufacturing is minimal, which is why most commercial buildings are located around the city of Blantyre in the southern region. This paper features an analysis of the currency troubles in Malawi, It analyses the state of the industry and tries to identify the causes of the financial issues before giving recommendations on the best actions to take.

Malawi’s Currency Troubles

After making tremendous progress over previous years, poor financial management and dictatorship from President Mutharika resulted into the country’s currency problems (Record, 2007). Due to his dictatorship, the groups offering financial support stopped as it was evident that his actions were wrong (Record, 2007). He did not want to accept correction, and anyone who tried criticizing him was harassed and jailed. Since the country was struggling, the value of the Kwacha declined in the market as no one was interested in trading with it. The countries that had partnered with it for trade purposes were no longer willing to import Malawi’s products as the country’s currency was clearly loosing value. As a result of his inexperience in the financial management sector, it was impossible for him to see a need for devaluing the Kwacha so as to save most of its funds.

Why Mutharika resisted IMF calls for currency devaluation

Before the currency issue, the Kwacha was pegged to the U.S dollar at 170 Kwacha to one dollar. However, after the currency troubles, the International Monetary Fund advised the president to devalue the Kwacha to 280  per dollar so as to encourage tobacco and tea exports. Unfortunately, Mutharika refused the deal, stating that the poor would get hurt as a result of the expected price inflation in case the decision is made (Masina, 2012). This president had a tendency of dictating everything, even those beyond his power. This is why he belittled the delegates of IMF, refusing to go to the called meeting where he would have received positive advice regarding the country’s situation. These are the factors which further harmed the country’s sources of aid as the IMF also paused a $79 million loan program it had with the country (Masina, 2012).

If Mutharika had lived, and still held on to his position with regards to the country’s currency, it is highly possible that Malawi’s economy would have become financially fragile. Financial fragility refers to the state where a country’s financial system becomes vulnerable to a crisis (Keister, 2016). As such, even the slightest shocks on the international economy would have greatly impacted the country’s finances. At the time of President Mutharika’s hospitalization, the country was already experiencing a high risk of this fragility, especially since no country felt comfortable transacting with it. Malawi would have had to depend solely on its internal economy for growth and sustainment of its population.

Effects of Devaluation

Devaluation has both positive and negative impacts. It increases the amount a country pays for its imports while decreasing the profits it gets when exporting (Masina, 2012b). Malawi’s economy, therefore, is expected to experience inflation, as there will also be an increased demand for its products (Musila & Newark, 2003). Although the growth would be slow, it is a better alternative compared to having to be financially fragile. This approach is good for the country’s economy as it ensures a continued relationship with trade partners. Therefore, the economy will still experience minimal benefits which are enough to guarantee its sustainability in the event of an international economic crisis (Musila & Newark, 2003)

Conclusion

            The effects of the decisions and actions of President Mutharika greatly impacted the currency of Malawi. Although there was a delay in taking the right measures to control these effects, the country is expected to continue its growth albeit slower than before. The devaluation decision was the right approach as it served to make trading partners more comfortable. It also encouraged organizations to continue with their aid programs in the country. However, as the country recovers, it will be important for the president to reevaluate the currency to a reasonable amount.

 

References

Keister, T. (2016). Bailouts and Financial Fragility. Review Of Economic Studies83(2), 704-736. doi:10.1093/restud/rdv044

Masina, L. (2012). Mutharika defies IMF on devaluation. African Business, (383), 74-75.

Masina, L. (2012, b). Pill too tough to swallow?. African Business, (388), 78-79.

Musila, J. W., & Newark, J. (2003). Does Currency Devaluation Improve the Trade Balance in the Long Run? Evidence from Malawi. African Development Review15(2/3), 339-352.

Record, R. (2007). From policy to practice: changing government attitudes towards the private sector in Malawi. Journal Of International Development19(6), 805-816. doi:10.1002/jid.1403

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