Malawi experiences chronic trade shortage since 1980 ; imports are more than exports which implies that the economic system spends more than it earns. As such, the state depends on aid from the IMF, the World Bank, and other bilateral givers to finance the spread.[ 1 ]The aid is through both commercial and concessional loans every bit good as grants. These funding options have non merely made the state accumulate debts but besides have exposed it to economic dazes. For case, in 2009, most givers were unable to perpetrate their support due to the planetary fiscal crisis, and in 2010, IMF besides stopped financing the state because of declining human rights conditions in the state. These made the state to see a deep recession between 2009 and 2011. The state was unable to finance its necessary import such as oil, machinery trim parts and fertiliser among others, hence production was negatively affected.[ 2 ]
IMF argues that devaluation of the Malawi currency, the Kwacha, and drifting it should be emphasized in order to increase exports or cut down imports or both so as to better the balance of trade state of affairs in the state. IMF says that “ over the old ages, relentless overestimate of the Kwacha has contributed to growing in imports outpacing growing in exports. ”[ 3 ]Therefore, they recommend that an exchange rate policy that makes the Kwacha lose value relation to other currencies will better the balance of trade status in the long-run. This is because volume of exports is increased as they are made cheaper in foreign money and volume of imports is reduced as they are made expensive in local money. In fact, Malawi has implemented this advice several times since 1980, but its benefits are yet to be observed.
Should Malawi concentrate on this policy to better the trade balance? On the one manus, some policy shapers are reasoning that it will so help the state, while on the other manus, others think that the policy is of less significance to the economic system. This contention is originating because the policy is based on a theoretical relationship between the exchange rate and the balance of trade, which depends on premises called Marshall-Lerner conditions. These premises are the beginning of the dissensions. Marshal and Lerner set up that if devaluation is to take to betterment of the balance of trade, foremost, the addition in the monetary value of imports should be able to incentivise the economic system to significantly replace the imports for local trade goods and, secondly, the diminution in monetary value of exports should besides be able to incentivise the trading spouses to significantly increase demand.[ 4 ]One group of policy shapers suggests that these conditions will non keep because of the nature and composing of Malawi ‘s exports and imports, while the other group believes that the premises hold in the long-run.
1.2 Thesis Statement
This survey, nevertheless, argues that devaluation will non incentivise aliens to demand more of Malawi merchandises or do the state cut down importing ; hence the trade balance will non better in the long tally. This is because the state ‘s chief exports are primary merchandises, and chief imports are merchandises that the state can non bring forth, but needs them. As such, this policy should be emphasised entirely as a solution to the trade shortages but instead it should be implemented along other policies that will change the export basket composing and domestic ingestion demands.
On the nature of exports, over 80 per centum of them are primary merchandises, which include baccy, tea, java and cotton.[ 5 ]These merchandises have a alone feature that their demand does non increase much when their monetary values travel down. For case, Todaro and Smith indicate that “ demand for primary merchandises is non really antiphonal to monetary value alterations. ”[ 6 ]In other words, international demand of these merchandises is inelastic ; it can non be increased simply by monetary value cuts. In add-on, the writers say that empirical grounds indicate that monetary values of primary merchandises are worsening over clip when compared to monetary values of manufactured merchandises. Therefore, the expected addition in exports gross as a consequence of addition in volume is offset by the diminution in international monetary values for primary merchandises comparative to manufactured merchandises. Such being the instance, accent should be on advancing value add-on and altering the nature of these exports, other than devaluation entirely.
On the composing of imports, trade statistics show that the state ‘s major imports include crude oil merchandises, fertiliser, other semi-manufactured merchandises, and machinery and trim parts.[ 7 ]The statistics reveal that since 1980, Malawi has failed to replace these imports despite the fact that their monetary values have been increasing in local money. In other words, it can be inferred that the demand for these imports is inelastic in the state ; they can non be reduced merely by monetary value increases. This is because they are necessities for the endurance of the economic system. In fact, the value of imports merely additions with consequence from devaluation. Thus a scheme that keeps the monetary values of imports low is better to the economic system ‘s growing than a policy that increases them.
Since exports are non likely to increase much and imports addition due to devaluation as explained above, hence, there is high chance that trade balance state of affairs will non better in Malawi due to devaluation. Such being the instance, schemes that purpose at advancing quality and value add-on on exports should be prioritised. Furthermore, policies that will help the destitute state to come up with efficient ways of bring forthing these merchandises, such as improved engineering, can be the best options. On of import note, devaluation tends to be inflationary when it does non take to worsen in imports and increase in exports. James Chad ( 2012 ) , for case, argues that devaluation has instantaneous consequence of increasing monetary values of imports ; hence cost of production besides increases. If imports can non be reduced over clip, high domestic monetary values are set to predominate. In this state of affairs, employees besides ask for higher rewards to keep their life criterions, which further increase the production costs. This “ wage-price spiral ” is so set into action.[ 8 ]Therefore a new set of challenges is introduced in the economic system.
1.3 Purpose of Study
This survey intends to bring forth empirical grounds on the effects of devaluation of the Malawi currency. Specifically, the survey will gauge the impact of devaluation on exports ; impact of devaluation on imports ; and impact of devaluation on trade balance ( the difference between exports and imports values ) . This is because designation of these relationships will help in work outing the current contention on whether this policy will help in bettering the trade shortage or non in the long term and within this, to what extent are imports and exports being affected. Thus policy shapers will hold grounds to implement policies that maximises societal public assistance of the state. In add-on, if the survey proves that so devaluation does non better trade balance in the state, it will be suspected of bring oning rapid rising prices, which is besides disturbing the state. But this survey will non look into this relationship as it needs a separate survey.
1.4 Research Questions
With the above intents in head, the survey will turn to the undermentioned inquiries:
To what extent does devaluation impact imports in Malawi?
To what extent does devaluation impact exports in Malawi? and
To what extent is the trade balance affected by devaluation in Malawi?
1.5 Administration of the Study
The staying portion of the survey is organised as follows: Chapter 2 explains the background analysis of the trade balance state of affairs in Malawi and the policies implemented so far to better the state of affairs. Chapter 3 provides the theoretical relationship between devaluation and exports, imports and balance of trade. It besides provides empirical grounds from surveies on these relationships. In add-on, the chapter states the significance of this survey. Chapter 4 trades with methodological analysis of the survey which is a sum-up of feasible definitions and measurings of balance of trade, exports, imports and devaluation. Chapter 5 is a treatment of the statistical consequences obtained based on the methodological analysis. Finally, chapter 6 is a sum-up of the chief findings of the survey. It besides outlines the countries that will necessitate farther research and the major failings of the survey.