Does currency devaluation improve trade balance? The case of Malawi

The purpose of this paper is to examine the effects of nominal effective exchange rate (NEER) changes on trade balance in Malawi. Using multivariate cointegration developed by Johansen (1988), the results of the study show that the impact of exchange rate devaluation on trade balance is significant in the long run. Moreover, trade balance is observed to have a greater impact with changes in domestic income. The results have important policy implications for decision makers in the government. Considering investment in the production of import substitutes and moving away from a highly dependent agricultural economy is of paramount importance for transition to an export dominant nation. More importantly, developing policy aimed at ensuring a consistent and growing level of foreign currency reserves through exports and tourism in Malawi should be at the forefront of immediate policy implementation. With the recent massive devaluation of the Malawian Kwacha, the investigation pertaining to short run effects of changes in exchange rate on trade balance is yet to be conducted. The findings to follow will add as an expansion to our current findings.