Malawi Economic Outlook
- Real GDP growth in 2012 slowed down following a contraction in the agricultural and manufacturing sectors, brought on by drought and a foreign exchange shortage. Growth in 2013 and 2014 is projected to rebound to 5.5% and 6.1%, respectively.
- Malawi’s programme with the IMF under the Enhanced Credit Facility (ECF) went off track in mid-2011 due to policy slippages, which triggered a suspension in donor budget support. The new government, which took over in April 2012 following the death of President Bingu Wa Mutharika, has instituted key policy reforms to address the macroeconomic imbalances and revive the economy. The government’s renewed commitment to sound macroeconomic policies and good governance has led to the approval by the IMF of a new ECF programme and resumption of donor support to Malawi.
- Malawi’s progress in poverty reduction has been slow. The challenge ahead is to make growth more inclusive and resilient to shocks. The country is broadly on track to achieving four of the eight Millennium Development Goals (MDGs).
Real GDP growth slowed to 4.3% in 2011 from 6.3% in 2010 on account of foreign exchange and fuel shortages, which disrupted activities in sectors such as manufacturing and trade. The shortage of foreign exchange in 2011 was caused by the decline in earnings from Malawi’s major export commodity, tobacco, and suspension of donor budget support.
Real GDP growth in 2012 is estimated at 2.0%, substantially lower than the 4.3% growth target. The sharp slowdown in the economy in 2012 was mainly due to the contraction in agricultural and manufacturing output. The agriculture sector, which dominates economic activities, shrank by 3.0% in 2012 on account of erratic rains and the collapse in tobacco auction prices. Real GDP growth in 2013 and 2014 is expected to rebound to 5.5% and 6.1%, respectively, anchored on the recovery in agriculture, manufacturing and wholesale and trade. The rebound is premised on a revival in tobacco production, an easing of the foreign exchange constraint, improved availability of fuel and a continuation of prudent macroeconomic policies.
Malawi faced serious macroeconomic challenges in 2011 and 2012. These were the result of inappropriate policies, which led to a growing fiscal deficit, rising inflation and the depletion of international gross reserves in a context of an overvalued exchange rate. The government, which came to power in April 2012 under the leadership of President Joyce Banda following the death of Bingu Wa Mutharika, has instituted bold macroeconomic policy adjustment measures to address the imbalances. These measures include the devaluation of the Malawian kwacha (MKW) by 49%, with a move towards a flexible exchange rate regime, a tightening of monetary and fiscal policy and a removal of subsidies on fuel. The government has also re-engaged with the IMF, resulting in the resumption of direct budget support by donors. These reforms have started yielding results, as evidenced by the easing of fuel shortages and improved access to foreign exchange by the business community.
Economic recovery, however, is fragile and the exchange rate may take time to stabilise given the excess demand for foreign exchange. The government’s second national development plan, the Malawi Growth and Development Strategy II (MGDS II, 2011-2016), was officially launched in September 2012 along with the Economic Recovery Plan (ERP). The latter aims to achieve economic recovery and mitigate the impact of the reforms on vulnerable citizens through immediate and short-term reforms and interventions to restore macroeconomic stability and re-prioritise expenditures toward sectors with the potential to boost economic growth and export earnings. These include agriculture, mining, energy, transport and tourism.
Malawi has diverse natural resources, ranging from land, water, forestry and minerals – much of which are unexploited. Mineral exploitation started only recently with the opening of the Kayelekera uranium mine in 2009. Thus, despite the diversity of its natural resources, Malawi’s economic structure has not changed much over the last two decades. While the share of mining in the GDP is still relatively small, there is potential for minerals to transform the Malawian economy by generating resources for investment in infrastructure and social service delivery and through spillover effects on local industries, including small and medium-sized enterprises (SMEs) and beneficiation.
Going forward, the challenge is to ensure the country’s natural resources are managed in environmentally sustainable ways and the wider population benefits from them through transparent mechanisms in awarding contracts/concessions and in the distribution of revenues.