When a Local Currency Devalues – A Case Of Malawi

By Burnett Munthali…..

Devaluation is the deliberate downward adjustment of a country’s currency value. The government issuing the currency can decide to devalue its currency. Devaluing a currency reduces the cost of a country’s exports and can help shrink trade deficits.

Many Malawians still do not fully understand what happens when a local currency is devalued. The Malawi Kwacha devalued recently and we have seen high cost of living for each and every commodity and service. However the issues of economy and inflation are difficult to follow As a result, many people just speak their opinion based on guess work.

Devaluing Currency

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.

There are major disadvantages of devaluation. Currency devaluation can present significant drawbacks, ranging from more expensive imports to higher inflation, as well as a decline in local consumer purchasing power. It can also result in less efficient and less competitive domestic industries in the medium term.

There are also many effects the devaluation of a nation’s currency have on its business firms. (a) On its business firms- Due to the devaluation of the nation’s currency, the other currencies become expensive as compared to the domestic currency. This results in the rise in the price of imports, which leads to an increase in the demand for domestic goods.

A pertinent form of economic uncertainty for developing countries today is that of devaluation risk: the possibility of a large decrease in the value of a country’s currency relative to other currencies.

Official figures are indicating that the Malawi kwacha depreciated against a majority of key trading currencies in late 2022 amid persistent demand and supply imbalances on the market.

One of the disadvantages of currency devaluation is increased cost price. In a country that depends on importation of machinery, equipment and raw materials, cost price increases. This in the long run may result in a decrease in production. Consequently, lowering product supply on the domestic market. This is exactly what is happening in this country.

In conclusion, when a country’s production costs are high, its goods and services become more expensive abroad than its competitors’ and lose competitiveness. By devaluing its currency against another, it can increase exports because its goods and services will cost less in the international market. Unfortunately, Malawi doesn’t have much to export. The country keeps importing more of its goods more than it can export.