LILONGWE-(MaraviPost)-Malawi’s currency lost nearly half its value against the US dollar, sparking concerns from some consumers in the country that basic goods will soar in price. Others hailed the central bank’s devaluation move as “overdue”.
The bank’s 44% decrease was brought in to better reflect the kwacha price in different markets.
One thousand seven hundred kwacha is now needed to buy one US dollar, up from 1,679.17.
It was the second time in 18 months that Malawi, one of the poorest countries in the world, significantly decreased the value of the kwacha in relation to the US currency.
Devaluation
By devaluing its currency, a country makes its money cheaper and boosts exports, rendering them more competitive in the global market.
Conversely, foreign products become more expensive, so the demand for imports falls. Governments use devaluation to combat a trade imbalance and have exports exceed imports.
The exchange rate affects the real economy most directly through changes in the demand for exports and imports.
A real depreciation of the domestic currency makes exports more competitive abroad and imports less competitive domestically, thereby increasing demand for domestically produced goods.
The study shows that in the short run currency devaluation leads to increase in output and improves the balance of payments but in the long run the monetary consequence of the devaluation ensures that the increase in output and improvement in the balance of payment is neutralized by the rise in prices.
A weak currency can have a significant impact on the citizens of a country in many ways.
Firstly, if the rand weakens, this could lead to high inflation rates, which will increase the cost of goods and decrease the purchasing power of the people, resulting in a lower standard of living.
The latest devaluation is reportedly aimed at correcting supply-demand imbalances and countering arbitrage opportunities that have arisen in the market, according to a statement signed by Reserve Bank Governor Wilson Banda. “Spot checks on some market players indicate that the market is able to clear import bills” at the new rate, it said.
A weak domestic currency makes a nation’s exports more competitive in global markets and simultaneously makes imports more expensive.
Higher export volumes spur economic growth, while pricey imports also have a similar effect because consumers opt for local alternatives to imported products.
In general, a weaker currency makes imports more expensive, while stimulating exports by making them cheaper for overseas customers to buy.
A weak or strong currency can contribute to a nation’s trade deficit or trade surplus over time.
Conclusion
A decrease in exports means that a country is importing more than its exports.
If demand for export decreases, it decreases the terms of trade of one country, reducing the revenue generated from exports.
According to reports, Malawi Kwacha has remained stable two months after the 44 percent devaluation, confirming government stance that the devaluation was the necessary devil.
The Reserve Bank of Malawi (RBM) devalued the local unit on November 9, 2023 to align the currency’s value with the market forces.
