Currency Trouble in Malawi Read the case on page 347 and 348 of the textbook. Pr
ID: 1213609 • Letter: C
Question
Currency Trouble in Malawi
Read the case on page 347 and 348 of the textbook.
Prepare an analysis of the case that addresses the three questions posted on page 348. This should be an analysis, not the simple answer of the three questions. The analysis must include an introduction, the analysis and conclusions. You must also incorporate the concepts covered in this week's reading in your analysis.
Submit the paper following the guidelines of the APA including academic references as appropriate. References taken from Wikis are not appropriate for this course. This is a 300 level course and you are expected to demonstrate good use of the English language. Spelling and grammar errors are unacceptable.
Explanation / Answer
Malawi was in the news because of its financial crisis. Malawi is battling severe fuel and foreign exchange shortages, in a country where 39% of the 15m population live on less than $2 a day.
Malawi's economic crisis began last year when British diplomats called Mr. Mutharika authoritarian in a leaked cable published by a local newspaper, and Mr. Mutharika reacted by kicking out the British ambassador.
The U.K. froze foreign aid in response. Other donors did the same in July after Malawian police killed at least 19 people while subduing antigovernment protests, according to U.S. and World Bank officials. Aid accounted for nearly half of government spending, and without it Malawi faces a $121 million budget shortfall.
At the same time, falling international tobacco prices have cut the country's income from its chief export. Tobacco, which accounts for 60% of Malawi's export earnings, brought $280 million into the country in 2011, down 22% from 2009, according to Malawi's Tobacco Control Commission.
Businesses were struggling to pay suppliers and to move money out of the small southern African country, and a slew of foreign companies were shrinking their operations
The International Monetary Fund has been pushing the government to devalue the kwacha, which was pegged to the U.S. dollar, to spur tobacco and tea exports.
The IMF wanted the kwacha to be devalued from an official exchange rate of about 170 to the dollar to about 280 kwacha to the dollar, which was closer to the black-market exchange rate. Devaluation was a prerequisite for restarting its $79 million loan program with Malawi, the IMF has said, which could prompt the World Bank and donor countries to restart aid flows as well.
The government devalued the kwacha by 10% in August, but the official exchange rate remained far below the black-market price for buying goods and exchanging currency, indicating that the move had little impact on the economy.
Mr. Mutharika has resisted deeper devaluation, saying the country's poor couldn't handle the resulting inflation. Mutharika had maintained that his administration would never devalue the kwacha, arguing that doing so would further hurt consumers in the country as prices of commodities and services would go up. He chided some local economists who were backing devaluation, saying they were “thinking like colonialists”. Mutharika said devaluing the currency further would invite national economic depression and that he would not buy economic orthodoxies that would hurt Malawians
Mutharika had said the persistent forex shortage problems were largely because of foreign investors who were externalising money and opening offshore accounts rather than banking locally. He singled out international chain stores like Shoprite, Game Stores and Mr Price and some banks he did not name, as investors that have caused the forex shortage, which has subsequently led to the current fuel crisis.
Mutharika until his death resisted pressure from IMF to devalue the currency and that policy certainly would have been disastrous if it had been continued. Businesses were already struggling to pay to its suppliers and with export falling; it would have stopped economic activity of the country. The country could have been pushed into chaos and it would have found difficult to pay for normal supplies also.
New president Joyce Banda, after Mutharika's sudden death, has moved quickly to restore relations with international lenders and donors. He fully liberalized the currency which was seen trading at 250 kwacha per dollar. It did not expect to worsen the situation as commodities were already trading at unofficial exchange rate. Further, IMF also expected to start payment it has promised with the condition of devaluation.
Most importantly, higher exchange rate and expensive import will create demand for local goods which will be good for the economy in the long term and it will aided by cheaper export from the country because of devaluation.
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