Currency trouble in malawi

1. Currency Trouble in
Malawi

2. Malawi Country Profile
• Landlocked country in southeast Africa bordered
by Zambia, Tanzania and Mozambique
• Independent from the UK on 6 July 1964
• Total area 118,000 square km
• Population 18 million
• Major religions: Christianity, Islam
• Capital and largest city Lilongwe
• Currency Kwacha
• Par capita income $330
• Economy depends on agricultural products

3. Background
• Malawi is one of the poor countries of the world where
People earn less than $1 a day
• In 2004 former WB economist Bingu Wa Mutharika
became the president of Malawi.
• He took initiatives to robust the country's economy by
taking several actions as:
• Subsidy program for fertilizer to help farmers
• Agricultural output expanded
• Economy bombed by 7% between 2005 and 2010
• Opened doors for foreign direct investment
• Aid money came from UK USA and IMF

4. Beginning of the crises: The role of Mutharika
The scenario of the country was pretty good until 2009 before
Bingu Wa Mutharika was re-elected.
• Mutharika became very dictatorial
• He took the full command of economic policy and declared
himself as “Economist in Chief” by pushing aside Central bankers
and ministers
• Did not tolerate any criticism and disrespect from anyone
• Critics at home were jailed and harassed
• Newspapers were controlled by the government .

6. Beginning of the crises : Role of Donners
• Denounce made by the UK for such oppressive regime as a result Mutharika
expelled the British ambassador from Malawi
• Countering this action, Britain freeze aid worth $550 million
• Within few months 20 people were killed as a result of anti government
movement
• Western countries and donners withdraw their support from the government.
• The president Mutharika also suggested donners to go to hell.
• UK and US stopped supporting Malawi by taking away their aid money
• At the same time, Tobacco sales that brings 60% of the foreign currency dropped
as a result of persisted drought and international demand and product quality
minimized
• Finally, in 2011 major foreign currency erupted

7. Background: Role of IMF
To overcame the foreign currency crises
the IMF prescribed the president
Mutharika
• To devalue the Kwacha from $1= KW 170
to $1= KW 280 to increase tea and
tobacco export
• Mutharika refused the proposal as
inflation might hurt the poor people of
the country
• As a result IMF denied to provide $79
million aid that exacerbated the
situation of the country

8. Background: End of Mutharika regime and
beggining of new era
• Early April in 2012, Mutharika had a massive
heart attack
• He needed medicine that was out of stock
• The hospital was out of foreign currency to bring
the medicine , As a result he died
• Joyce Banda, the Vice president took the power
of the country
• Pressure from UK and US to devalue the Kwacha
by 40%
• Blocked loan was unblocked and aid started
increasing

9. Case Questions
1. What were the causes of Malawi’s currency troubles?
2. 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?
3. Now that Malawi’s currency has been devalued, what do you think the
economic consequences will be? Is this good for the economy?

10. 1. What were the causes of Malawi’s
currency troubles?

11. Causes of Malawi’s currency troubles
• Over dependency on foreign aid from UK
and US
• Dictatorial leadership of Mutharika
• Decrease in tobacco sales
• Rejection of IMF advice to devalue
Kwacha
• Failure of political leadership
Five
reasons

12. 2. 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?

13. Reasons of resistance with IMF
Resist for
currency
devaluation
Mutharika might have own views of currency devaluation
Further deteriorate the Existing economic instability
Rise in price inflation and affect the poor Malawi's
As a dictator he thought that if he bowed down to the IMF, he might
lose the control of the country
He did not trust the intentions of the IMF

14. If Mutharika still alive, Current Situation
would be…
• Put the country into deep troubles
• Civil war might start in Malawi
• The country become poorer and the existence might at stake
• He would not listen to any one from inside and outside of the country
as he declared himself as “Economist in Chief”
• For lack of political instability, economic growth and the development
of the country would hamper

15. 3. Now that Malawi’s currency has been devalued,
what do you think the economic consequences
will be? Is this good for the economy?

16. Effect of Currency devaluation
• Obviously, currency devaluation would work in favor of the economy
in several ways
1. Rise in price inflation and increase the sufferings of poor
2. Export might increase
3. Britain might released the freezed $550 million aid
4. US and other donners would start providing more aid
5. Suggestion of IMF would bring the county into the right track
6. There would have some short term benefit with long term consequences

18. Thank You