Sustainability of the Current Account in Malawi
Persistent current account imbalances in many developing countries in Africa, Asia and South America and recently in the US have excited considerable interest among economists and policy makers seeking to have a clear understanding of the role and importance of current account imbalances in macroeconomic issues. Evidence has shown that a lot of countries, both developed and developing, have run large and persistent current account deficits which have been followed by, among others, severe economic crises. These crises exposed the weaknesses of the traditional theories of current account determination in explaining a country’s external vulnerability. Despite the manifested importance of the issue of current account sustainability, empirical work on the subject in Malawi is quite limited. A few studies have emerged on current deficits in Malawi in single country analysis; Kahn and Knight (1983), Debelle and Faruqee (1996), and Chinn and Prasad (2003). These studies have dwelt on the determinants of current account but have not tackled the issue of sustainability. The IMF (2006) tackled the issue of sustainability but was in a multi-country framework, in which Malawi was inclusive. The problem with this study is that the coefficients derived were standard for a group of countries that have different initial conditions and are affected by different shocks. As such, undertaking a single country study is important as the results found from this study will be unique and relevant for Malawi. Furthermore, this study covers the period 1980 to 2010 of which the start period was chosen because at the beginning of the 1980s, the current account had significantly deteriorated. The end period, on the other hand, covers the period when issues of globalisation and cross border operations which have affected Malawi’s current account have come to the fore. Lastly, by using three complementary approaches, this study, to our knowledge, is the first comprehensive study of assessing the sustainability of Malawi’s current account position. Thus, this study contributes to the existing literature on sustainability of the current account.