Files
Abstract
The effects of successive currency devaluations, since the 1980s, on Malawi's trade balance
are analysed. The major hypothesis tested is that currency devaluation leads to an improvement in trade
balance through changes in the real exchange rate. This hypothesis is not supported by the data for
Malawi. Although there is evidence of a lagged adjustment yielding an improvement in the trade balance
three years after devaluation, the magnitude of this improvement is insufficient to overcome the initial
decline in the trade balance following devaluation. The extent of improvement is not consistent with that
implied by the hypothesized J-curve effect. The analysis suggests that a one percent rise in real domestic
income results in 0.5 per cent per reduction in the trade balance, whereas changes in real foreign income do
not appear to have any effect on the trade balance. The lack of responsiveness of Malawi's trade balance to
changes in foreign income may be associated with the unmanufactured nature of Malawi's export
commodities and the relatively unfavorable market conditions for these exports in the major importing
western countries. Other policy measures than those that have been relied on to date are evidently necessary
for the desired improvements in trade balance to be achieved.