Economics and Business Forum

A strong currency and a weak currency

When we read newspapers or listen to some radio commentaries we get the impression that President Joyce Banda has inflicted harm on everyone by succumbing to IMF pressure for a 50 percent devaluation. On deeper probing and analysis we will find that some sectors of the economy have actually benefited though they have not gone up the rooftops to proclaim their joys.

A currency that depreciates or id devalued hurts some people, but benefits others similarly, a currency that is appreciate or is revalued benefits some people but hurts others.

We use the term appreciation when a currency rises in value automatically without government intervention due to demand and supply , similarly we use the term depreciation when a currency loses its strength due to weak demand in the market. This newspaper almost daily gives exchange rates of the kwacha against the main currencies of the world and we notice that they vary daily.

Devaluation and revaluation are government fiats and are given only periodically to try and correct a persistent current account imbalance. Devaluation is more common than revaluation and it is resorted to in order to boost exports and slow down imports.

When the kwacha was devalued imports became more expensive. Those people who regularly import or buy goods from abroad lost their purchasing power whether as consumers or producers. Those who regularly imported cars now found they had to pay more. Manufacturers who use imported raw materials found their costs of production going up, and their final products becoming uncompetitive in the market.

Devaluation benefited exporters, foreigners found the kwacha cheaper to buy. They were therefore able to buy more of our products which are priced in kwacha.

Those who have been paid in dollars for their exports and convert those dollars into kwacha receive more than they receiving before devaluation.

When a currency is revalued foreigners have to pay more units of their currency to get it. Exports from a country that has revalued its currency now costs more. Revaluation hurts exports but it makes imports cheaper.

We see then that the interests of importers and exporters are affected differently. The effects of devaluation corresponds with the effects of depreciation. The effects of revaluation corresponds with the effects of appreciation.

What makes exchange rates vary? So long as central banks do not attempt to influence exchange rates, the equilibrium exchange rate is determined by the market forces. The market forces themselves depend on the state of the economy.

When the Malawi economy is healthy and Malawi’s exports increase, there will be a high demand for kwacha. The increase in demand will make the kwacha appreciate that is increase in value. When Malawi’s exports decline but its imports increase in Malawi there will be high demand of the currency such as pounds or dollars in which prices are dominated. The value of the foreign currency will increase (appreciate) while that of the kwacha decrease (depreciate). Currencies are mere barometers which measure the health of an economy.

Changes in the economy are a function of a variety of factors. One of these factors is consumer tastes. Malawians are known to hace strong appetites for exotic goods, Despite the slogan, “Buy Malawian.” They still buy or import foreign goods in abundance.

As long as exports fall behind imports, the tendency will be for the kwacha to depreciate in relation to the currency in which imports are denominated.

Relative incomes. In general a strong (appreciating) currency indicates economic health and a weak (depreciating) currency indicates economic ill-health or sickness.

Some economists see an exception to this rule. They notice that when a country experiences faster economic growth than the rest of the world the value of its currency will tend to depreciate. This is because such a country imports more than it exports.

Relative exchange rates among trading nations also effect exchange rates. A country that experiences inflation rates that are higher than those of other countries will see its currency depreciating. A good case is what happened to the currency of one of the Sadc region countries.

Relative interest rates also matter. A country whose securities offer higher interests will attract investors from abroad. There will be high demand for the currency in which bonds or treasury bills are denominated. The higher the demand for a currency as for any commodity the higher its price.

An expectation about the future state of the economy affects the exchange rates. If people believe that the economy will experience high inflation rates they will tend to avoid keeping their savings in such a currency, some will sell, when too much of the currency is being offered for sale its price will fall. In other words it will depreciate.

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Economics and Business Forum

A strong currency and a weak currency

When we read newspapers or listen to some radio commentaries, we get the impression that President Joyce Banda has inflicted harm on everyone by succumbing to IMF pressure for a 50 percent devaluation. On deeper probing and analysis, we will find that some sectors of the economy have actually benefited though they have not gone up the rooftops to proclaim their joys.

A currency that depreciates or is devalued hurts some people, but benefits others similarly, a currency that is appreciate or is revalued benefits some people but hurts others.

We use the term appreciation when a currency rises in value automatically without government intervention due to demand and supply, similarly we use the term depreciation when a currency loses its strength due to weak demand in the market. This newspaper almost daily gives exchange rates of the kwacha against the main currencies of the world and we notice that they vary daily.

Devaluation and revaluation are government fiats and are given only periodically to try and correct a persistent current account imbalance. Devaluation is more common than revaluation and it is resorted to in order to boost exports and slow down imports.

When the kwacha was devalued, imports became more expensive. Those people who regularly import or buy goods from abroad lost their purchasing power whether as consumers or producers. Those who regularly imported cars now found they had to pay more. Manufacturers who use imported raw materials found their costs of production going up, and their final products becoming uncompetitive in the market.

Devaluation benefited exporters, foreigners found the kwacha cheaper to buy. They were therefore able to buy more of our products which are priced in kwacha.

Those who have been paid in dollars for their exports and convert those dollars into kwacha, receive more than they receiving before devaluation.

When a currency is revalued, foreigners have to pay more units of their currency to get it. Exports from a country that has revalued its currency now costs more. Revaluation hurts exports but it makes imports cheaper.

We see then that the interests of importers and exporters are affected differently. The effects of devaluation corresponds with the effects of depreciation. The effects of revaluation corresponds with the effects of appreciation.

What makes exchange rates vary? So long as central banks do not attempt to influence exchange rates, the equilibrium exchange rate is determined by the market forces. The market forces themselves depend on the state of the economy.

When the Malawi economy is healthy and Malawi’s exports increase, there will be a high demand for kwacha. The increase in demand will make the kwacha appreciate that is increase in value. When Malawi’s exports decline but its imports increase in Malawi there will be high demand of the currency such as pounds or dollars in which prices are dominated. The value of the foreign currency will increase (appreciate) while that of the kwacha decrease (depreciate). Currencies are mere barometers which measure the health of an economy.

Changes in the economy are a function of a variety of factors. One of these factors is consumer tastes. Malawians are known to have strong appetites for exotic goods, despite the slogan, “Buy Malawian.”

They still buy or import foreign goods in abundance.

As long as exports fall behind imports, the tendency will be for the kwacha to depreciate in relation to the currency in which imports are denominated.

Relative incomes. In general a strong (appreciating) currency indicates economic health and a weak (depreciating) currency indicates economic ill-health or sickness.

Some economists see an exception to this rule. They notice that when a country experiences faster economic growth than the rest of the world, the value of its currency will tend to depreciate. This is because such a country imports more than it exports.

Relative exchange rates among trading nations also effect exchange rates. A country that experiences inflation rates that are higher than those of other countries will see its currency depreciating. A good case is what happened to the currency of one of the Sadc region countries.

Relative interest rates also matter. A country whose securities offer higher interests will attract investors from abroad. There will be high demand for the currency in which bonds or Treasury bills are denominated. The higher the demand for a currency as for any commodity, the higher its price.

An expectation about the future state of the economy affects the exchange rates. If people believe that the economy will experience high inflation rates they will tend to avoid keeping their savings in such a currency, some will sell, when too much of the currency is being offered for sale, its price will fall. In other words it will depreciate.

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One Comment

  1. Dear Mr DD Phiri. I am in agreement with most of this article on devaluation of kwacha. The highlight for me is when you mention “Buy Malawi” and “Malawians love exotic imports “. You see thats where the problems lies. We Malawians we import basically everything. Cars, television, metals, fuel, ferlitizer. etc.. etc and all this point to Balance of payment deficit to negative. So the devaluation of kwacha means shooting ourselves on the foot. we need more kwacha than before to buy certain goods which we cant do without and some unscrupulous traders will pass that extra cost of imports to a poor man on the street .so you see the domino effects are going to be unaccounted for.Thanks

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