Malawi Economic Outlook
- Malawi’s economic growth decelerated to 2.9% in 2015 (down from 5.7% in 2014), due largely to external and internal shocks to the economy, but it may pick up to 4% in 2016.
- High inflation in 2015 continued to undermine Malawi’s prospects for economic growth and poverty reduction, necessitating a further tightening of monetary and fiscal policy.
- Key challenges to Malawi’s urbanisation process stem from the lack of capacity to meet the basic social and economic needs of a growing urban population.
In 2015, buffeted by weather and policy shocks, Malawi’s real GDP growth was estimated at 2.9%, down from 5.7% in 2014. Floods and dry spells reduced maize production by 30%, resulting in a 2.3% slowdown in agriculture sector growth. This caused food insecurity for an estimated 2.8 million people (16% of the population). The contraction in agricultural production and reduced demand affected the wholesale, retail and manufacturing sectors. The services sector, particularly information and communication, proved more resilient, registering 9% growth. This was partly driven by rapid expansion in mobile phone services. In 2016, economic growth is projected to rebound to 4%, possibly reaching 4.9% in 2017, with agriculture as the main driver. The growth outlook is premised on favourable weather conditions, macroeconomic stability, consistency in policy implementation and renewed private-sector confidence. Population growth of 2.8% a year will require consistent economic growth to reduce poverty and improve progress towards the Sustainable Development Goals.
Fiscal pressures intensified in the 2014/15 fiscal year because of shortfalls in external financing due to the continued suspension of budgetary support, lower domestic revenue, and expenditure overruns, particularly on wages and salaries and on interest payments. Restoring confidence will require deeper public financial management reforms to improve accountability and transparency in the management of public funds. Inadequate fiscal adjustments widened the fiscal deficit beyond forecasts, driving up net domestic borrowing, inflation and interest rates. Inflation surged to 24.9 % in December 2015 as food supplies ran low and the Malawi kwacha (MWK) depreciated more than expected. Monetary policy was further tightened to contain inflation and achieve exchange rate stability. Inflation is projected to decline to 18.1% in 2016, remaining above the government’s initial 12% target. The sharp decline in the local currency has been driven by foreign-exchange demand pressures and persistent current account deficits, estimated at 6.0% of GDP in 2015 and expected to remain within the 6-7% range in 2016 and 2017, reflecting the narrow export base and strong dependence on imports and external aid.
Urbanisation in Malawi poses both challenges and opportunities for transformation. The country is one of the least urbanised in the region, but the 3.8% urban growth rate is higher than the overall population growth rate of 2.8%. The major challenge is to meet demand for housing and other basic services, despite limited resources. However, urbanisation presents an opportunity if its potential to transform the economy can be harnessed.