Thursday, October 4, 2012

Malawi's Economic Recovery Plan

The Government of Malawi implemented the first Malawi growth and Development
Strategy (MGDS) from 2006 to 2011, as its overarching medium term development
framework aimed at reducing poverty through economic growth and infrastructure
development. During that period, the economy registered an average growth of 7 per
cent. It is now the second year of implementation of MGDS II, covering the period
2011 to 2016
During the first year of the MGDS II implementation, Malawi faced a number of
macroeconomic challenges. These challenges included reduced disposable incomes
due to poor tobacco revenues, scarcity of foreign exchange and power disruptions.
Consequently, economic performance slowed down and Growth Domestic Product
(GDP) grew by only 4.3 per cent compared to 6.9 per cent projected in the MGDS II.
The severe shortage of foreign exchange had negative impact on imports of strategic
commodities including fuel and industrial raw materials. This situation was
exacerbated by an overvalued official exchange rate and tight administrative
Although average inflation rate in 2011 remained at a single digit (7.6) the country
started experiencing a steady rise in general price levels from early 2011, reflecting a
pass through effect from increased petroleum pump prices and continued fuel supply
disruptions. Consequently, the average annual inflation rate for 2012 has been
projected to accelerate to 18.4 per cent.
It is with the above background that Cabinet directed that an Economic Recovery
Plan should be developed. The Recovery Plan outlined reforms that were to be
undertaken to improve the country’s prospects for socio-economic growth. It also
outlined the areas that the country would focus on for quick economic gains. The
recovery plan has been enriched by Cabinet discussions and the National Dialogue
on the Economy that took place in Mangochi from 29
June, 2012 to 1
July, 2012.
The Recovery Plan
Given the economic challenges outlined earlier, implementation of the Economic
Recovery Plan was urgent. Thus the recovery plan embraced a set of immediate
(within 3 months), short term (1 year) and medium term (2-5 years) policy reforms
aimed at restoring external internal economic stability. It further proposed measures
to cushion the vulnerable from the impact of any reforms particularly the exchange
rate policy. In addition the plan proposed increasing resource allocation to areas that
would address constraints to economic growth such as energy and to those aimed at
boosting production for the export market.
Immediate Policy Reforms
A. Exchange
macroeconomics balance is a realignment of the exchange rate regime to
one that is credible to all market players and allows business to return to
normal. To this end, the following reforms were implemented:
 Immediate removal of restriction on the foreign exchange bureau market as
was the case before the devaluation, in August 2011, to allow them
determine their own mid-rate;

 The devaluation of the Malawi Kwacha to the country’s major trading
currencies was effected in May, 2012;
 A flexible exchange rate regime was adopted;
 Discontinuation of the pre-screening requirement of imports in excess of
USD50, 000 allowing importers to freely import their requirements; and
 Reversal of surrender requirements for tobacco dollars and allow tobacco
proceeds to go to commercial banks
B. Foreign Exchange Reserve Cushion: In order for the exchange rate
reforms not to be economically and socially disruptive, there was need for
some foreign exchange reserves. The foreign exchange reserves would be
essential to meet the need for strategic fuel supplies, social support package
and outstanding arrears on foreign bills. To this end, the following measures
were undertaken:
 Conclusion of negotiations on the resumption of support from United
Kingdom and other development partners;
 Resolution of misunderstanding with some development partners on
governance concerns, including those raised by the Millennium Challenge
 Conclusion of the new extended credit facility (ECF) with the International
Monetary Fund (IMF) which will trigger Balance of Payments and budget
support from bilateral and multilateral partners.
It is expected that the above measures would complement the inflow of foreign
exchange from exports of agriculture products such as tobacco, sugar, tea and
C. Fuel Pricing: Over the past years the Government has been controlling fuel
pump prices. This meant subsidising fuel when international prices rise and
thus accumulating deficits in the Price Stabilisation Fund (PSF) hence posing
a risk to the budget. To eliminate this risk, the country returned to the
Automatic Pricing Mechanism (APM)
D. Monetary Policy: The success of the proposed macroeconomic reforms
hinges on implementation of monetary policy that is less expansionary and
accommodating. It was imperative to tighten monetary policy by increasing
the cost of credit and mopping up excess liquidity. Going forward, periodic
use of interest rates, as and when market conditions dictate will be
instrumental to the smooth conduct of monetary policy
Short Term Reforms (1 year)
A. Social Support Package: Economic reforms normally bring unintended
negative socio-economic impacts on the general population which need to be
mitigated. This is particularly so for the poor and vulnerable households in
both rural and urban areas. Therefore as the country is implementing the
reforms, it is imperative that interventions to protect the most vulnerable
communities be scaled up. To this effect, Government will undertake the
following programmes:
 Scaling up Labour Intensive Public Works Programmes (LIPWP)
 Scaling up the Farm Input Subsidy Programme (FISP)
 Scaling up legume seed multiplication, agro-forestry and soil conservation,
multiplication of cassava cuttings and sweet potato vines and extending
village savings clubs
 Scaling up School Meals Programme and Vitamin A Supplementation; and
 Continuing the Social Cash Transfer Programme
B. Fiscal Policy: The conduct of fiscal policy in the Financial Year (FY) 2012/13
is critical to the success of the recovery plan. The impact of some of the
activities implemented within the 3months with flow through the financial year.
To this effect, the recovery plan was crafted taking into consideration the
capacity to generate domestic revenue and inflow of donor funds against
expenditure pressures such as growing wage bill, the social support
interventions, as well as the need to support sectors that stimulate economic
Accordingly for FY 2012/13 a decision was made to prioritize expenditures to
sectors that would enhance economic growth, create employment, and boost
production and diversification for the export market for quick foreign exchange
generation. The prioritized sectors for rapid foreign exchange generation
include agriculture, fisheries and tourism. To this end, efficient and reliable
energy will be required to promote value addition, export diversification and
boost growth in these sectors and other potential sectors such as mining
Medium Term Reforms (2 – 5 years)
Benefits of implementing the short-term activities outlined above would flow into the
medium term. It is expected that the economic challenges the country is
experiencing would stabilize in the medium term. The medium term agenda for the
country is outlined in the MGDS II. However, considering the constraints and
challenges the country is experiencing, the National Dialogue of the Economy
proposed that priorities in the MGDS II should be reviewed and refocused for rapid
Medium term Focus Areas
Economic growth in Malawi is constrained by a number of factors including energy,
transport and limited exports. To contain the situation the country will ensure that
energy generation and supply, transport infrastructure and exports diversification are
addressed quickly. Tourism, mining, manufacturing, commercial farming and agro-
processing will assist in generating the desired foreign exchange earnings. Going
forwards, focus will therefore be placed on the following sectors:
 Energy;
 Tourism;
 Mining;
 Agriculture; and
 Transport infrastructure and ICT
The country continues to face a number of challenges in the energy sector. These
include inadequate capacity to generate electricity and intermittent supply.
Consequently, economic activity in areas such as mining and manufacturing are
Government will therefore support investments in energy generation and supply in
order to generate and distribute sufficient amount of energy to meet national socio-
economic demands. It will endeavour to, among other activities to do the following:
 Continue financing works at Kapichira II Rehabilitation Project;
 Establish new hydro stations;
 Continue pursuing the Millennium Challenge Compact with a view to widen its
 Manage the demand in the industry by encouraging economic usage of
electricity, including use of energy of saver bulbs;
 Encourage regional interconnectivity;
 Explore establishment of coal generated electricity;
 Enhance research in other sources of energy including wind and solar; and
 Promote Public and Private Partnership (PPP) in energy generation and
Tourism has the potential to generate revenue, employment, improve infrastructure
and promote Micro Small and Medium Enterprises as well as conserve wildlife and
culture. The sector has direct linkages with other sectors of the economy. However,
the industry faces a number of challenges which include poor supporting
infrastructure, poor service delivery, uncoordinated and insufficient marketing of
tourism products and inadequate purpose built infrastructure.
To promote the industry, Government will undertake the following:
 Develop support infrastructure (electricity, water and transport);
 Restock game reserves and national parks and protecting animals
 Intensify marketing of the country as a preferred tourist destination and
aggressively put measures to increase flights to Malawi, including direct flights
from Europe;
 Undertake a program to educate more trained staff, supervisors, and
managers in the tourism sector;
 Enhance marketing of Malawi’s tourism products;
 Restore and improve tourism assets, including supporting the restocking of
game and parks;
 Simplify the system of Visa Issuance for tourists; and
 Improve tourism investment climate
Malawi has abundant mineral resources that can be exploited. These resources
include bauxite, heavy mineral sands, monazite, coal, uranium, precious and semi-
precious stones, limestone, niobium, dimension stones and rock aggregates. Growth
in this sector has slowed due to inadequate availability of energy. It is, therefore,
expected that with improvement in the energy sector, there will be availability of
electricity, which will in turn help to develop the mining sector and hence improve the
country’s foreign exchange earnings.
To derive maximum potential of the mining industry, Government will aim at
increasing production and value addition of mineral resources. To achieve this, the
following will be undertaken:
 Establishment of legal and institutional framework;
 Updating the geological information system;
 Undertake a crash program to train mining engineers, legal experts in mining
and other related fields in the sector;
 Enhance oil exploration and capacity building initiatives in the sub-sector;
 Enhance oil exploration and capacity building initiatives in the sub-sector;
 Ensure transparency in all mining contracts and close monitoring; and
 Promoting participation of local and foreign investors in the mining industry
Agriculture remains key to the country’s economic growth, wealth creation and food
security. However, the sector is still dependent on rain-fed and subsistence farming.
It is characterised by low absorption of improved technologies, poor infrastructure,
inadequate markets and inadequate investment in mechanisation.
The sector is dominated by tobacco and subsistence maize production hence the
need for diversification and a focus on commercialisation for export markets. Besides
diversification of crops, the sector will also focus on animal farming and fisheries.
The following actions will be undertaken:
 Diversify and upscale production of key crops that have potential for export
market-including groundnuts, rice, coffee, sunflower, soya, pigeon peas,
cotton and sugar;
 Continue the Greenbelt Initiative with focus on irrigation farming of high value
crops, aquaculture and animal farming;
 Enact and implement amendments to the land legislation, including the
enactment of the Land Bill;
 Review the strategic Crops Act as it disadvantages some crops and brings
distortions in the industry;
 Encourage large-scale commercial farming;
 Adopt Integrated Production System (IPS) which will promote contract
 Support agro-processing;
 Increase cage farming in fisheries to meet local demand for export market;
 Improved animal farming; and
 Increase and improve agricultural extension services
Transport Infrastructure Development and ICT
Poor transport infrastructure continues to impinge on domestic and international
trade and therefore posing major challenge to economic growth and development.
Similarly, poor ICT discourages movement of vital information that is necessary for
improvement of trade. Government will therefore aim at improving infrastructure
development programmes focusing on road, rail, air transportation and ICT
Rail Transport
Government will aim at reducing transport cost by making rail transport safe, efficient
and competitive by undertaking the following:
 Rehabilitate and expand the railway line and related infrastructure; and
 Create linkages to ports, industrial sites and regional and international
markets focusing on those that are linked to the priority crops and clusters
Road Transport
Considering that road transport is the dominant mode of transport in Malawi,
Government will target reducing cost of high transportation in the country by:
 Continuing to construct, rehabilitate and upgrade road infrastructure;
 Improving network of feeder roads, focussing particularly on roads that
support growth of selected crops such as sugarcane, groundnuts, soya and
sunflower for production, processing and export; and
 Developing strategic corridors that are cost effective for international trade.
Air Transport
Government will continue to aim at improving air transport efficiency to encourage
trade, tourism and investment by:
 Improving, promoting and providing safe, efficient, reliable aviation
infrastructure and services;
 Promoting a competitive and efficient air transport industry including by
decisively solving the problems of Air Malawi; and
 Promoting PPPs to facilitate private investment
Government will aim at improving usage and adoption of electronic and online
services; availability of service; geographical coverage; and usage of modern
broadcasting technology and reducing communication costs by:
 Improving the regulatory framework for the sector;
 Liberalising the mobile telecommunications sector to encourage new
international entrants; and
 Ensuring liberal regulatory environment regarding international ICT gateway
Annex III shows a list of prioritized projects to be implemented by these sectors.
Good governance in the implementation of this plan will play a critical role in
achieving social and economic development of the country. It will enhance efficiency
in institutions and sustain a stable economic and political environment necessary for
economic growth and effective functioning of public services. It will also promote rule
of law, human rights, and guarantee property and personal rights which attract
private sector investment
Implementation Framework
Evidence shows that programme implementation in Malawi has to some extent not
been successful due to a number of factors ranging from lack institutional capacity to
deliver and coordination of challenges. The success of the recovery plan will
therefore, hinge on the strong institutional arrangements and coordination of various
activities in the Plan.
In this regard, the Ministry of Economic Planning and Development (MoEPD) in its
mandate to provide strategic direction for the economy through designing and
formulating long and medium term national development strategies will coordinate
the implementation of this recovery plan. This coordination role will be strengthened
and supported by the Office of the President and Cabinet (OPC). OPC will provide
overall oversight and supervisory function to ensure that the Recovery Plan is
implemented. The Ministry of Finance (MoF) will provide resources to the sectors
that will be implementing the plan. Furthermore, it will prioritise expenditures to these
growth enhancing sectors. To this end, Fiscal Policy will therefore aim at spurring
fiscal consolidation, reinforcing resilience to shocks and supporting private sector led
growth. The Reserve Bank of Malawi (RBM) is expected to pursue prudent monetary
policy, through restrained monetary aggregate growth, to contain aggregate demand
and inflation pressures and shift demand toward domestic output.
Lead ministries in the various sectors mentioned herein will spearhead the
implementation. They will provide coordination roles and functions at sector level.
The Civil Society and private sector are expected to implement specific activities and
provide oversight and accountability functions. Donors and cooperating partners are
expected to provide technical and financial support for the implementation of the
recovery plan. Donors and cooperating partners are expected to provide technical
and financial support for the implementation of the recovery plan to ensure the
country moves on to prosperity.
Monitoring and Evaluation (M&E)
All development endeavours will run well if they are cited on a good M&E framework.
Supervision of the process and monitoring of results is thus critical for achieving the
set objectives and outcomes. In this regard, the recovery plan will be subjected to a
quarterly review by the Cabinet or the Cabinet Committee on the Economy and
Public Sector Reforms to assess progress made towards the implementation of the
Plan. MoEPD and OPC as the coordinating and overseeing institutions for the
recovery plan will serve as the Secretariat in the implementation of the Plan by
ensuring that information is available for decision making. The Plan has also
assigned responsibilities and timeframes for implementation. The success and
effective implementation will hence not only depend on MoEPD and OPC at the
Central Level but also lead Ministries at sectoral levels. It is imperative, therefore,
that all institutions actively and effectively execute their roles and responsibilities. To
this end, the M&E Matrix is presented in Annex 2