What were the causes of Malawi’s currency troubles?

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

What were the causes of Malawi’s currency troubles?

Currency Trouble in Malawi

When the former World Bank economist Bingu wa Mutharika became president of the East African nation of Malawi in 2004, it seemed to be the beginning of a new age for one of the world’s poorest countries. In land- locked Malawi, most of the population subsists on less than a dollar a day. Mutharika was their champion. He introduced a subsidy program for fertilizer to help poor

farmers and gave them seeds. Agricultural output ex- panded, and the economy boomed, growing by 7 percent per year between 2005 and 2010. International donors loved him, and aid money started to pour in from the United Kingdom and the United States. By 2011, foreign aid was accounting for more than half of Malawi’s an- nual budget.

In 2009, to no one’s surprise, Mutharika was reelected president. Then things started to fall apart. Mutharika became increasingly dictatorial. He pushed aside the country’s central bankers and ministers to take full con- trol of economic policy. He called himself “Economist in Chief.” Critics at home were harassed and jailed. Inde- pendent newspapers were threatened. When a cable from the British ambassador describing Mutharika as “auto- cratic and intolerant of criticism” was leaked, he ex- pelled the British ambassador. Britain responded by freezing aid worth $550 million over four years. When police in mid-2011 killed 20 antigovernment protesters, other aid donors withdrew their support, including most significantly the United States. Mutharika told the do- nors they could go to hell. To compound matters, to- bacco sales, which usually accounted for 60 percent of foreign currency revenues, plunged on diminishing inter- national demand and the decreasing quality of the local product, which had been hurt by a persistive drought.

By late 2011, Malawi was experiencing a full-blown foreign currency crisis. The International Monetary Fund urged Mutharika to devalue the kwacha, Malawi’s cur- rency, to spur tobacco and tea exports. The kwacha was pegged to the U.S. dollar at 170 kwacha to the dollar. The IMF wanted Malawi to adopt an exchange rate of 280 kwacha to the dollar, which was closer to the black market exchange rate. Mutharika refused, arguing that this would cause price inflation and hurt Malawi’s poor. He also re- fused to meet with an IMF delegation, saying that the del- egates were “too junior.” The IMF put a $79 million loan program it had with Malawi on hold, further exacerbating the foreign currency crisis. Malawi was in a tailspin.

In early April 2012, Mutharika had a massive heart attack. He was rushed to the hospital in the capital Lilongwe, but ironically, the medicines that he needed

were out of stock—the hospital lacked the foreign cur- rency to buy them! Mutharika died. Despite considerable opposition from Mutharika supporters who wanted his brother to succeed him, Joyce Banda, the vice president, was sworn in as president. Although no one has stated this publicly, it seems clear that intense diplomatic pres- sure from the United Kingdom and United States per- suaded Mutharika’s supporters to relent. Once in power, Banda announced that Malawi would devalue the kwa- cha by 40 percent. For its part, the IMF unblocked its loan program, while foreign donors, including the UK and United States, stated that they would resume their programs.


  1. McGroarty, “Currency Woes Curb Business in Malawi,” The Wall Street Journal, April 4, 2012; P. McGroarty, “Malawi Hopes New Leader Spurs Recovery,” The Wall Street Journal, April 8, 2012; J. Herskovitz, “Malawi Paid Price for Ego of Economist in Chief,” Reuters, April 16, 2012; A. R. Martinez and F. Jomo, “Malawi to Devalue Kwacha 40% to Unlock Aid,” Bloomberg Businessweek, April 27, 2012.

Case Discussion 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?



Respond to the given questions:

  • Number the answers and submit them in the Blackboard assignment tab.
  • Please make sure each answer is at least 200 words long.

What were the causes of Malawi’s currency troubles?

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