Case Study: Currency Trouble in Malawi
This case study provides a detailed account of the currency crisis in Malawi. Different reasons have been discussed for this crisis, most of which seem to revolve around the decisions that the president made. IMF has suggested that a drop in the value of the currency would contribute to give a kick to the worsening economy of the country but the president did not agree to it. The case study also provide details of the consequences of keeping the value of the currency at its current position. In the following, I have provided detailed answers to the questions asked towards the end of the case study.
What were the causes of Malawi’s currency troubles?
Malawi used to get a lot of foreign donation in the form of foreign currency like US dollars and British Pounds. This has stopped and this is one of the reason of the currency crisis in the country.
International Monitory Fund or IMF has stopped its loan to the country. This has also contributed to the crisis. IMF provide financial assistance in the form of loan to world countries but there are also certain conditions to be fulfilled by these countries (Dreher, 2006). The president of Malawi was reluctant to accept these conditions.
60% of Malawi foreign revenue is achieved from agricultural means. The condition of agriculture is deteriorating and hence the foreign revenue of the country is also deteriorating. The foreign currency that used to come to Malawi via their agricultural exports decreased significantly. Therefore, the foreign reserves of the country have also decreased.
The central bank of the country is not an independent organization. It is not free in making financial and economic decision. Instead it is in the control of the government and the decisions by the government and especially the president of Malawi are not economic but political in nature. Therefore, the economy of the country is suffering.
There is a lake of vision by the political leadership. They are making short term decisions without looking at their long term consequences. Therefore, the economy of the country has to suffer as these decisions are not even working in the short term.
Why did Mutharika resist IMF calls for currency devaluation? If he had lived and remained in power, what do you think would have happened to the economy of Malawi assuming that he did not change his position?
Mutharika might has his own views of about the currency devaluation. There is already a wave of economic instability in the country. He resisted the call for currency devaluation because he believed that it would add to the troubles of the people as it could result in more inflation instead of decreasing it.
Mutharika was leading the country like a dictator. I think that he might have taken the situation personally as might be thinking that he would lose control of the country if he bows to the calls of IM. Therefore, he might have resisted the calls for currency devaluation.
In the case study, it is mentioned that he also did not met with the IMF delegation as he believed they were too young to be dealt with. This suggests that Mutharika did not trust the intentions of IMF as well. Therefore, it was hard to agree to their suggestions.
Mutharika died in 2012 from a heart attack (“Malawi president ‘dead after heart attack'”, 2012). At the time of his death, Britain had already stopped their $550 million aid. Other donor countries were also thinking of stopping their aid. IMF had stopped the delivery of $79 million loan due to differences with Mutharika’s policies. Due to decrease in quality of the agricultural items especially tobacco, the export revenue had dropped by 60% putting pressure on the income of poor farmers.
All the above circumstances dictate that Mutharika, if lived longer, would have put the country into many more troubles. The country would have become poorer and its existence might have been at stake. Mutharika was not ready to listen to anyone from within the country or any one from the outside world. He had been putting his opponents in jail which resulted in political turmoil in the country. Increased political instability would have caused more troubles for the country than it had at that time. Political stability is important for economic growth of a country (Maier, 1987).
Now that Malawi’s currency has been devalued, what do you think the economic consequences will be? Is this good for the economy?
The economic consequence would have been in the favor of Malawi. I hope that Britain had released the $550 million aid money. Also I hope that other countries had continued their aid to Malawi. IMF would have played an important role in this regard as it not only provides loans to countries but also provided workable programs for a country to bring in economic growth. Due to the death of Mutharika, the country must have gained some political stability. The economic growth of the country is also heavily dependent on agriculture. Though it takes time to improve agriculture and benefit from it. So, I think that there would have been some short term benefits of the devaluing of currency and then there would be some long term consequences.