Malawi’s currency devaluations have come at a steep welfare cost with a new study estimating that an exchange rate shock could cost households $6.8 million (about K12 billion) under a flexible exchange-rate regime.
The study, Exchange Rate Shocks and Household Welfare by University of Malawi economists Edward Leman, John Magombo and Lucius Cassim, analysed monthly data from January 2019 to November 2024, covering consumer prices, the kwacha-US dollar exchange rate, interest rates and industrial production, alongside household data from the fifth Integrated Household Survey.
During the period under review, the kwacha suffered major devaluations of 25 percent in May 2022, 44 percent in November 2023 and 25 percent in May 2024, while the study notes that cumulative depreciation against the US dollar over the past decade had reached nearly 280 percent.
The study estimate that a one percent depreciation reduces household welfare by 11.04 percent, with welfare declining by 6.09 percent among non-poor households and 4.04 percent among poor households, as higher prices erode purchasing power and real incomes.
The economists argue that to ensure the management of exchange rate movements, more efforts should be channelled towards generating sufficient foreign reserves as a one percent depreciation raises food prices by almost three percent, particularly hurting households because food accounts for 57.9 percent of total household expenditure.
Reads the study in part: “The over-dependence on imports for almost all categories of consumption exposes Malawians, especially the non-poor households, to exchange rate volatility risks.
“As the country aspires to ‘leave no one behind’ in its quest for middle-income status and improved welfare, it is important that policymakers pay more attention to exchange rate movements and ensure price stability.”
The study puts the welfare cost of an exchange-rate shock at $5.66 million (about K10 billion) under a fixed regime.
In terms of exposures, Malawians in general are more exposed to the food consumption component, as at the national level, 57.9 percent of the households’ consumption out of the total expenditure goes to food.
Malawi Economic Justice Network (Mejn) executive director Bertha Phiri earlier linked exchange rate fluctuations to amplifying inflationary pressures in the country, with every depreciation of the kwacha quickly feeding into the cost of imported goods and production inputs.
She said the situation is worsened by a thin foreign exchange market where businesses often raise prices in anticipation of higher import costs while fuel and fertiliser price increases eventually spill over into food inflation.
Phiri cautioned that any devaluation without adequate foreign exchange supply and measures to boost production can only intensify inflationary pressures.
Prior to securing the previous Extended Credit Facility (ECF) with IMF in November 2023, Malawi devalued the kwacha twice. Firstly by 25 percent in May 2022 and secondly in November 2023 by 44 percent.
Malawi is currently discussing a new ECF with the IMF amid assurance from Minister of Finance, Economic Planning and Decentralisation Joseph Mwanamvekha that government will prioritise conditions that will not hurt the masses already reeling under a burden of high cost of living.
