Harmonizing to the Reserve Bank of Malawi, exchange rate disposal in the state aims at achieving three chief aims which include: Attainment of growing in existent income ; Maintenance of a feasible balance of payments place ; and Attainment of stable domestic monetary values. The Banks indicates that “ these aims were attained to some extent in the 1970s ; but, owing to both external and internal factors, they were hard to accomplish in the eightiess. ”[ 1 ]Therefore, presented below is a brief history of the exchange rate policy in the state implemented in the quest to accomplish these aims.
Nail downing of British Pound to Malawi lb system ( 1965-1973 ) .
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From 1965 the Malawi currency was fixed at one to one ratio with the British lb sterling until 1973. However, the currency was freely drifting against the US dollar and other trading spouses.
Nail downing of Malawi Currency to weighted Basket of British Pound and the US dollar ( 1973-1975 ) .
In 1971 the Malawi currency was renamed from lb to Kwacha and from 1973 the state linked the currency to a leaden basket of the British lb and the US dollar.
During this period the cardinal bank pursued dynamic exchange rate policy, which involved expressed devaluations when a demand arose.
The Peg to the IMF SDR ( 1975-1984 ) .
From 1975, the Kwacha was pegged to the IMF ‘s Special Drawing Rights ( SDR ) . This agreement was short-lived as the SDR began to appreciate in response to the US dollar hence the Kwacha besides appreciated. This affected export development.
Peg to the Weighted-Basket of Seven Currencies ( 1984-1994 )
Despite the devaluations carried out in 1982 and 1983, the state ‘s external state of affairs continued to deteriorate, therefore in 1984 governments de-linked the Malawi kwacha from the SDR and pegged it to a trade weighted-basket of seven currencies stand foring the geographical composing of Malawi ‘s trade and the currencies used in settling the state ‘s international minutess.
Flotation of the Malawi kwacha ( February, 1994-2012 )
In 1988, the Malawi authorities embarked on structural accommodation plan, as such, in 1994 the foreign exchange market was wholly liberalized and the kwacha was allowed to drift freely. However, from 2007 to 2012, the state relied on a managed float ( about repairing the kwacha to the dollar ) after it noticed that there were great fluctuations in the value of the currency against major merchandising spouses. From 2012 the state reverted to the free natation system.[ 2 ]
2.2 The Real Effective Exchange Rate ( REER ) Trend
The REER is a leaden exchange rate of several currencies of major merchandising spouses against the local currency. Graph 2.1 below indicates that the Malawi Kwacha has been losing its value in existent effectual footings over the period 1980 and 2010. However, there is demand to prove if this loss in values is statistically important. The major end has been to do exports competitory so as to better the trade balance state of affairs in the state.
Beginning: World Bank database[ 3 ]
2.2 Trade Balance, Exports and Imports Trend
Trade shortage as a per centum of GDP has been deteriorating since 1980 as can be observed in the upper subdivision of graph 2.2 below. This can be attributed to the fact that imports have been increasing more than exports over the period under reappraisal as presented in lower subdivision of graph 2.2. Of significance is the fact that imports and exports have besides been traveling in the same way over the period under reappraisal. In periods where exports increased, imports besides increased and where exports decreased, imports besides decreased. This suggests that devaluation additions imports and exports and grasp decreases both exports and imports in the short term.
Beginning: World Bank database
2.4 Composition of Exports and Imports and Reasons for Fluctuations in Trade Balance
Agribusiness is the chief stay of the economic system as it contributes an norm of 32 per centum to Gross Domestic Product ( GDP ) over the period under reappraisal. It besides accounts for about 90 per centum of entire exports. The major harvest in the export basket is tobacco, representing 53 per centum. Other major exports include tea, sugar, cotton and java. “ The agricultural sector employs 87 per centum of the state ‘s labour force and rural countries are place to 85 per centum of the population ” making subsistence farming. Such being the instance and from the fact that Malawi is a little economic system, which means its export market is non limited, betterments in exports and trade balance, have chiefly been attributed to good public presentation in agribusiness sector from good conditions and other intercessions that boot production other than the depreciation of the Malawi currency.[ 4 ]
Fertilizers top the list of the fastest growth imports due to the fact that the economic system relies significantly on agribusiness. Second on the list are crude oil merchandises, which include petrol Diesel and paraffin. The other major imports are manufactured nutrient materials and drinks, and machinery and equipment. As the economic system grows, the demand for these imports has besides increased aggressively since they are necessary natural stuffs for production in the economic system. These points are non produced in the state ; as such, increasing monetary values due to devaluation has non deterred importing of these goods significantly as they are necessities. As such, devaluation has non to a great extent improved trade balance over the period under reappraisal since imports besides increased when exports increased due to devaluation.[ 5 ]