Abstract

Understanding the effect of fiscal deficit on the exchange rate is important in Malawi, given the increased fiscal deficits and unstable exchange rate movements. This study investigated the effect of fiscal deficit on the exchange rate for Malawi from 1981 to 2021. The study tested the existence of the two main channels on the effect of fiscal deficit on the exchange rate for Malawi. The study examined the current account and inflation channels. Data for the study were obtained from the and Economic Affairs of Malawi, the Ministry of Trade, the Reserve Bank of Malawi, and the National Planning Commission. The study employed the Structural Vector Autoregressive (SVAR) Model. The dickey-Fuller test was used to determine on stationarity of the variables. The results indicated that the variables used in this study were stationary at level and first difference form. The study found that fiscal deficit has a significant effect on the exchange rate for Malawi. The study also revealed that the current account balance and inflation channels exist in Malawi. The study recommends that government should put measures aimed at reducing the unhealthy borrowing for consumption which suffocates investments and focus on increasing the production of exportable goods to generate more foreign reserves.

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School	: School of Law, Economics and Government
Issued Date	: 2024

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