Abstract

The objective of the paper is to examine the sustainability of current account in Malawi. The study employs econometric analysis and solvency approaches to complement each other. Results from both approaches confirm that Malawi’s current account deficits were excessive and unsustainable during the period of 1980 to 2010. Results from the econometric analysis reveal that for Malawi’s current account to move towards a sustainable path, particular attention should be paid to the following factors: external debt, terms of trade, openness, real exchange rate, net foreign assets and growth. Furthermore, the current account deficit was excessively above the norm, deviating by an average of 5.0% during the study period. The solvency approach to current account sustainability further confirms that the country was running an unsustainable current account deficit. Interestingly, even after the highly indebted poor countries (HIPC) relief, the current account was still unsustainable. In this regard, policies should ensure that the real exchange rate is not overvalued, growth is enhanced particularly in the export sector and also ensure that external debt is sustainable. These will ensure sustainable current account.

Key words: Current account deficit, external sustainability, Malawi.

Abbreviation

JEL classification: F32