The Determinants of Current Account Imbalances in Malawi

Abstract

Persistent current account imbalances in many least developed and emerging countries have excited considerable interest among researchers and  policymakers to have a clear understanding of the dynamics of the current  account and its role in macroeconomic outcomes. Based on the saving-investment theory, this study used cointegration analysis to identify the long run and short run determinants of Malawi’s current account deficit using  annual data from 1980 to 2006. The results suggested that openness, terms of trade, external debt accumulation, the real exchange rate and current account liberalisation fundamentally determined the current account deficit in Malawi. Further, the results revealed that these deficits have been, to a large extent, persistent.