Thursday, November 10, 2011

The World Bank and Others Suspend Funding to Malawi

CIA World Fact Book: Malawi Country Profile
Maravi Post: World Bank to Malawi: Put Your House in Order
Nyasa Times: World Bank Tells Malawi: Address Concerns to Get Aid
Reuters: Malawi Donors to Continue Withholding Aid: Paper
The Star: Malawi Abandons Tobacco for Crop Diversification, Food Security

Malawi, a small, landlocked country in southeastern Africa, currently has one of the fastest growing economies in Africa. Despite the strong growth, Malawi is still struggling with economic and political issues associated with being an underdeveloped country. Adding to these problems is the recent decision of the World Bank and a large number of other donors to withhold $500 million in aid until certain political and economic concerns are addressed. The funding issues are particularly sensitive due to recent economic problems.

Among the political policy concerns that lenders want Malawi to address are threats to media freedom, overall poor governance, deteriorating human rights, and the government’s handling of anti-government demonstrations where twenty protestors were killed. In addition to political concerns, the World Bank is concerned about an economic policy calling for the adherence to a zero-deficit budget, meaning that the country’s spending is higher than its revenues. Many economists believe running a deficit can help reverse an economic downturn. In times of financial hardship demand for goods decreases, which reduces sales and, therefore, profits, which leads to job and wage cuts, which further reduces demand. Governments, in some instances, can reverse this cycle by spending money to increase demand. To do so, however, the government may have to borrow money, and, thus, run a deficit.

If the Malawi Government addresses the above political and economic concerns, budgetary funding from the international community will resume. The funding is especially important given the country’s current economic problems. Tobacco accounts for 70% of the country’s export revenue, but a combination of the global economic recession, overproduction, and anti-tobacco campaigns have reduced its global demand and price, putting deflationary pressure on the Malawian currency. A currency’s value is affected by many factors, one of which is the number of individuals who need to purchase a currency to pay for goods purchased from that country. With the demand and price of tobacco declining, fewer people are buying tobacco from Malawi, which means fewer people need to purchase Malawian currency. This reduced demand leads to a decline in the exchange rate.

The International Monetary Fund (IMF) recognized that the decreased demand for Malawian goods has lead to its currency being overvalued because its value has remained the same even though demand has fallen due to the government’s use of a fixed exchange rate system. During the summer of 2011, the IMF suggested that the exchange rate should be lowered to encourage foreign investment (a cheaper currency means lower costs for foreigners) and align the Malawian exchange rate with what it would be if determined by the free market. The Malawi government followed the IMF’s suggestion and devalued their currency by approximately 10%. Because the Malawian currency is now worth less on the international market, the cost of importing food and oil has increased, which has lead to hardship for many of the country’s citizens, and made the need for international aid especially pressing.

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