Impact Of Exchange Rate Volatility On Trade Balance For Malawi

The aim of the study is to estimate the impact of exchange rate volatility on trade balance for Malawi.We achieve this by estimating the effect of volatility on imports and exports,as well as analyzing its overall relationship to the trade balance.The hypothesis guiding the study is that Exchange Rate Volatility and Trade Balance for Malawi have a positive relationship.Trade Balance for Malawi has since 1980 remain in deficit despite the government adopting several trade and monetary policy adjustments to curb the situation.The deficit has been due to several factors among them;lack of trade competitiveness,narrow productivity base,weak domestic and international trade linkages and systems,lack of diversification,lack of competitive local industries and volatility of the exchange rate.Trade deficit has continued to grow despite the availability of countless market access opportunities available through trade agreements at bilateral,regional and multilateral level.The deficits have been influenced in part by the economy's overdependence on imported products as the economy cannot afford to operate without them.Some of the key products and commodities include fertilizer,petroleum products,transport equipments,pharmaceuticals,medical equipment,military weapons,motor vehicles,electrical appliances,printing materials and consumer food stuff.The Malawi government has over the course of the last century adopted and implemented a variety of monetary policies as well as experiment a variety of exchange rate regimes in order to exercise and preserve a strong intensity of control over the nominal exchange rate,using it as a mechanism to enhance growth while shielding consumers and investors from inflation.However,changes in monetary policy regimes as well as the local policy shocks,outside economic shocks and weather shocks,have all influenced the variability of the Malawi currency and its competitiveness.As the aim of the research study is to estimate the impact of exchange rate volatility on trade balance for Malawi,we use the annual time series data for imports and exports for the period 1994~2015,Malawi real exchange rate,Malawi and USA CPI's(2010=100)and Domestic and Foreign GDP's as our variables.We employed the Mean Adjusted Relative Change Statistical Model to estimate volatility.We further tested the data to check if it is stationary using the Augmented Dickey Fuller(ADF)unit root test which we find most of the variables to be stationary at second difference.We then run regressions in E-Views using the Ordinary Least Square.The overall finding of the study reveals that volatility has a positive impact on trade balance components for Malawi,although the impact is not too significant.The reason is that much as volatility has influenced growth in exports,it has equally and more rapidly influenced growth in imports,which outweighs the returns from exports,since Malawi is an import intensive country.The study has also concluded that trade deficit for Malawi is not a sign of distress on the economy(as statistics shows that the economy has continued to grow)but rather a sign of rising domestic demand and investment,as such there is need for the Malawi government to focus on reducing and eliminating the trade barriers in order to encourage growth in trade.Another conclusion is that depreciation of the Malawi currency is effective in improving the trade balance in the long run,however,in the short run the trade balance initially deteriorates but eventually improves.Therefore,the response of trade balance to exchange rate volatility appears to meet the Marshal-Lerner condition for depreciation to improve trade balance in the long run.