Saturday, December 27, 2014

A Story of Malawi's Economy

Malawi has not fully recovered from the serious macroeconomic challenges it faced between 2011 and 2012 as a result of misplaced policies of former president Bingu wa Mutharika’s administration. These misplaced economic policies led to a growing fiscal deficit, rising inflation and the depletion of international gross reserves in a context of an overvalued exchange rate.

However, the administration of President Joyce Banda, which came into power on April 7, 2012, attempted to institute bold macroeconomic policy adjustment measures to address the imbalances. These measures included the devaluation of the Malawi kwacha (MKW) by 49 percent in 2012, with a move towards a flexible exchange rate regime, the tightening of monetary and fiscal policy, and a removal of subsidies on fuel. The government also re-engaged the International Monetary Fund, resulting in the resumption of direct budget support by donors.

These reforms, somehow, yielded positive results, with fuel supplies returning to normal, and forex reserves propping up, resulting in the easing of fuel shortages and improved access to foreign exchange by the business community. Economic recovery, however, remained fragile and the exchange rate may take time to stabilise given the excess demand for foreign exchange.

Unfortunately for Malawi, development partners have frozen financial aid in the wake of free-for-all plunder at the seat of government, Capital Hill, putting Malawi in danger of facing similar serious macroeconomic challenges that were characteristic of the twilight days of the Bingu wa Mutharika regime. 

In other words, Joyce Banda found a demolished wall and reconstructed it; and, then, demolished it again through the plunder of public resources dubbed Cashgate. 

When President Peter Mutharika won the May 20 Tripartite Elections, he knew very well that he was inheriting an economy in crisis. Malawi's development partners are yet to unfreeze the much-needed financial aid. The only sector getting resources from development partners is, to some extent, the non-state actors' sector. Even even there a drought looms.

The situation is further worsened by the fact that the country is approaching a farming and also a lean season. Being a farming season, this is a time when the country imports a lot of farm inputs thus it may lead to a serious erosion of our import cover. Being a lean season, prices of food commodities, especially maize traditional go up and this year the situation is further compounded by the fact that the country is facing hunger. 

These challenges pose the potential of further leading to a growing fiscal deficit, rising inflation and the depletion of forex reserves which inadvertently will impact the lives of poor Malawians. Given this dire situation, it is important for the government to revise its budget, alter budget lines that we can do without as a country and put the money where it is absolutely necessary.

In conclusion, the situation is not promising at the moment. Malawi is back to Square One.

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