Devaluation is the intentional downward adjustment of a country’s currency value. The government that issues the currency can decide to devalue it. Devaluing a currency reduces the cost of a country’s exports and can help alleviate trade deficits.
Many Malawians still do not have a full understanding of the consequences of devaluation of their local currency. The Malawi kwacha recently underwent devaluation, which has led to an increase in the cost of living for all goods and services. However, it can be difficult to understand the complexities of the economy and inflation, so many people express opinions based on speculation.
A weakened domestic currency makes a country’s exports more competitive in global markets while simultaneously increasing the cost of imports. This can boost economic growth through increased export volumes, and it can also affect imports, as consumers may prefer to buy local alternatives to imported products.
Currency devaluation also has significant disadvantages. These include higher prices for imports, higher inflation, and reduced local consumer purchasing power. It can also lead to less efficient and competitive domestic industries in the medium term.
The devaluation of a country’s currency also affects its businesses. First, because the domestic currency has been devalued, foreign currencies become more expensive in comparison. This leads to higher import prices, which drives up the demand for domestic goods.
A significant form of economic uncertainty for developing countries today is the risk of devaluation: the potential for a significant decrease in a country’s currency value relative to other currencies.
Official data indicates that the Malawi kwacha depreciated against a majority of key trading currencies in late 2022 due to persistent demand and supply imbalances in the market.
One of the disadvantages of currency devaluation is increased cost pricing. In a country that relies on imported machinery, equipment, and raw materials, cost prices rise. This can lead to decreased production over time, resulting in lower product availability in the domestic market. This is the case in Malawi.
When a country’s production costs are high, its goods and services become more expensive abroad than its competitors’, which undermines competitiveness. By devaluing its currency against another, a country can boost exports, as its goods and services become more affordable in the international market. However, Malawi does not have significant exports; it continues to import more goods than it exports.