Malawi's Economy Swings from Boom to Doom

Over six years after Malawi registered the second fastest world economic growth rate, the economy seems to be gaining ground on its free-fall from boom to doom.

According to the World Bank’s January 2016 issue of Global Economic Prospects (GEP), the country does not even appear among the top six countries set to become Africa’s fastest growing economies this year.

The report is titled ‘Global Economic Prospects January 2016: Spillovers amid Weak Growth’.Leading the park of the fastest growing economies on the continent is Ethiopia. The World Bank projects that Ethiopia could register a Gross Domestic Product (GDP) of 10.50 percent in 2016, up from 9.50 percent last year. Second on the list is the Democratic Republic of Congo, which is expected to register a GDP of 8.50 percent this year. 

The Ivory Coast, with a projected economic growth of 7.70 percent, Mozambique [7.30 percent], Tanzania [7.10 percent], and Rwanda [7.00 percent] are the other countries billed to register significant GDP growth in 2016.

The development comes barely six years after the Economist Intelligence Unit indicated the country’s economy was the second-fastest growing economy in the world, second only to oil-rich Qatar. This did not come as a surprise as the country registered consecutive bumper harvests in the 2005/06, and 2006/07 growing seasons.

"Malawi has had two good years of bumper maize harvest and is in

surplus of about 1,1 million tonnes," Nasinuku Saukila, general

manager of the National Food Reserve Agency told international media in April 2007. 

 

Saukila made the remarks when Malawi was preparing to export 400 000 tonnes of the staple to the then cash-strapped Zimbabwe.
However, diplomatic spats, including with Malawi’s former colonial master, Britain, meant the country was walking a dangerous export path as fuel and sugar became scarce commodities in one of the worst economic disasters to befall the nation. The situation continued until April 2012, when former president the late Bingu wa Mutharika died and his vice, Joyce Banda, took oath of office on April 7, 2012.
Among other recovery measures, Banda introduced a National Economic Recovery Plan.

“Within months of assuming office, I instituted an economic recovery programme to restore macroeconomic stability and lay the foundations for long-term growth. The economic recovery plan includes a combination of measures designed to stabilise our economy [such as the devaluation of the kwacha, the loosening of foreign-exchange controls and strong fiscal discipline], as well as social-protection programmes designed to cushion the poorest in our society from some of the unintended negative consequences of the austerity programme,” Banda told The European Times in 2012.

 The plan supported projects in the agriculture, mining, energy, tourism and infrastructure sectors.

 Banda’s ascension was followed by the January 2013 visit by International Monetary Fund (IMF) Managing Director, Christine Lagarde, who hailed the economic recovery plans.

Half-way to safety

“During my discussions with Malawi’s leaders, I congratulated President Joyce Banda on the bold economic policies of her administration, including the liberalisation of the foreign-exchange market. I welcome the President’s efforts to address unforeseen challenges through her continued commitment to economic reforms.

“Malawi has already made significant progress in addressing the serious imbalances that were hampering economic growth just a few months ago. Malawi must stay on course, while putting in place social-protection programs to alleviate the impact of the adjustment measures on the poorest households,” said Lagarde, adding: “Malawi is half across the river, and the other bank is within reach.”

 

The Reserve Bank of Malawi (RBM), in its first Monetary Policy statement for 2016 released on Thursday, indicated that it “…intends to maintain a tight monetary policy stance in the coming months while ensuring sufficient foreign exchange reserves to support private sector activities”.

 The central bank is, mainly, counting on prospects for improved crop production in the 2015/16 growing season, hinting that it is targeting a 19.3 percent decline in inflation.
 Finance Minister, Goodall Gondwe, said on January 5 that the government is confident it is on track to meet conditions that would attract budgetary support from the World Bank and the European Union totalling up to K50 billion.
 Gondwe has also projected economic stability by May.
 “We are about to complete [sic] some of the conditions,” Gondwe told the media. “For the past three months, we have almost stopped domestic borrowing,” said Gondwe.
 He added that, while the country’s economy is projected to grow by 3 percent this year, a good harvest could spur it towards a five percent economic growth.

Lost path

However, apart from the institutional bodies such as the World Bank and IMF, Gondwe is not so sure about the comeback of bilateral donors, observing that bilateral donors have deserted not only Malawi but other countries as well.

This position was first announced by President Peter Mutharika’s address during the opening of the 46^th Session of Parliament on November 6, 2015.

“For years, we have relied on budgetary aid while dependency mentality deepened and our poverty rose. Now, there is no more budgetary support. The age of donor aid seems to be gone. Our developing partners remain with us only with support outside the budget,” said Mutharika.

According to economic expert, Henry Kachaje, the kwacha’s value continues to fall, “considering that inflation averaged 24 percent in 2015 and that the kwacha devalued by almost 42 percent”.

The Reserve Bank of Malawi (RBM’s) has indicated in its first Monetary Policy statement for 2016 that inflation is forecast to decline to 19.3 percent with a better crop in the 2015/16 growing season. However, the central bank’s rate is higher than the government’s target of 14.2 percent.

Despite RBM’s optimism for a good crop, preliminary results indicate that the country’s green gold, tobacco, may not do well this year.

Tobacco Association of Malawi president, Reuben Maigwa, has cited poor rains as the main challenge.

“Most farmers have planted the crop but, due to low rainfall, there is compromised production. We may not produce sufficient crop and the crop may be marred by poor quality,” said Maigwa in an interview.

The development comes at a time when prospects for tobacco are becoming less promising. Earnings from tobacco dropped by 8 percent last year from $366.3 million (about K205 billion) earned in 2014 to $337.3 million (about K189 billion).

Challenges

According to the 2015 World Bank Assessment on the ease of doing business, the business environment is one of the factors negatively impacting on economic performance.

The assessors put Malawi on position 141 out of 189 countries on ease of doing business. However, the 2015 ranking was a marked improvement from position 164 the previous year. It was the first time in three years for Malawi to register a positive movement on the index.

However, Industry and Trade Minister, Joseph Mwanamvekha, has revealed that Mutharika has directed the ministry to get the country into the top 100 by 2017.

“As a Ministry, we believe it is doable and we are going to achieve that,” said Mwanamvekha.

Some of the steps he identified as signs of government’s commitment include the review and enactment of the Insolvency Act, the Companies Act and the Credit Reference Bureau Act in line with on-going government reforms.

Despite the reforms, however, business captains have bemoaned the country’s “punitive” tax regime, with Indigenous Business Association of Malawi president, Mike Mulombwa, bemoaning the operating environment in 2015.

“The revenue collectors have a narrow tax base and are squeezing money out of the already burdened taxpayers. Secondly, we have the problem of high interest rates, mainly because there are no cut off points for interest in Malawi. In other countries, lenders stop collecting interest on loans once a borrower has paid back half of what they borrowed,” said Mlombwa.

MRA Commissioner General, Tom Malata, told The Business Times of January 6, 2016 that “the Malawi Revenue Authority is expected to collect K597 billion in the 2015/16 fiscal year based on the 2015/16 national budget estimates”.

Malata further indicated that MRA collected K233.6 billion against the target of K247 billion between July and November 2015. This represents 95 percent of the targeted collections.

MRA missed its target for the first quarter of 2015 as it collected K193.58 between July and October 2015. The tax collector also missed its October target by 5 percent as it only collected K53. 03 billion against the target of K55.97 billion.

Mutharika hinted in November that revenue under-collecting was one of the factors fuelling government’s appetite for borrowing.

“Mr. Speaker Sir, it is important to reiterate that the over-expenditure was largely due to revenue under-collection, low grant inflows during the 2014/15 financial year…. It must be remembered that government has committed obligations we cannot escape even in hard times,” said Mutharika.

According to the January GEP issue, the global economy has been misfiring.

Among other things, it observes that global growth slowed to 2.4 percent last year, and is expected to recover at a slower pace than previously envisioned, as growth is projected to reach 2.9 percent in 2016, thanks to a modest recovery in advanced economies.

As Mutharika warned during the opening of the 46^th Session of Parliament, “More than ever, we need economic prudence and innovation. Malawians must understand the changing times we live in. We must work and endure our painful path to economic sovereignty. And we must do what it takes to end the suffering of our people.”

However, People’s Party spokesperson on finance and economic issues, Ralph Jooma, observed that the greatest challenge facing Malawi is over-projection of figures, citing the 2014/15 K930 billion budget as a case in point.

 

Jooma said a realistic budget would have hovered around K800 billion. He said this means exaggeration exacerbates the trend where the country misses out on most of its financial targets.

 Business and economic experts have also raised doubts over the country’s ability to shake off 2015 economic challenges.

Malawi Confederation of Chambers of Commerce and Industry president, Newton Kambala, told The Daily Times of January 5 that this year’s economic prospects could be less promising.

 “Obviously, the bad side of this [uncontrolled public finance expenditure] is that businesses will remain uncompetitive and eventually slow down the economic activities. All economic variables have signalled a failing economy with rising inflation, high interest rates, fluctuating foreign exchange rates,” Kambala was quoted as saying.

 On his part, Economics Association of Malawi executive director, Edward Chilima, was quoted as saying, “If nothing happens, the growth would be very low this year, way below projected figures. We don’t see any changes in the agriculture sector; we are still inefficient and we cannot see a very good crop this year”.