Sustainability of the Malawian Current Account Deficit: Application of Structural and Solvency Approaches

The objective of the paper is to examine the sustainability of the current account in Malawi. The study employs both econometric analyses 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 percent 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 rates is not overvalued, growth is enhanced particularly in the export sector and also ensuring that external debt is sustainable will be key to ensuring sustainable current account