Malawi

Economic growth

Real GDP growth was estimated at 5 per cent in 2013, up from 1.8 per cent in 2012. This was due to a good tobacco season and strong recovery of growth in manufacturing, construction, and the wholesale and retail trade sectors. Strong recovery in tobacco output boosted overall agriculture sector growth to 5.7 per cent from a 2.3 per cent contraction in 2012. Agriculture accounted for 31 per cent of GDP in 2013, as seen in appendix table A5.2. Manufacturing, with a share of 9 per cent of GDP, grew by 6.2 per cent, reversing the 2.3 per cent contraction of 2012, supported by an improvement in the availability of foreign exchange. Manufacturing is dominated by agro-processing, and was further boosted by expansion in agricultural output. Growth of services remained buoyant in 2013. Telecommunication and financial services continued to drive the expansion of services with growth rates of 7.9 per cent and 6.1 per cent, respectively, in 2013

Construction, which was among the sectors hit hardest during the economic downturn, recovered strongly. The resumption of major construction projects boosted construction sector growth from 2.6 per cent in 2012 to 7.1 per cent in 2013. Major construction projects under implementation include the Nacala railway corridor.

The mining and quarrying sector grew at a rate of 8.5 per cent in 2013 following increases in production of uranium, coal and lime. While mining is now the fastest- growing sector, its share of GDP is still small, at 5 per cent. On the demand side, Malawi’s growth was driven by public and private consumption and the increase in public investment. As earlier noted in chapter III, the current situation where the contribution of agriculture to GDP is higher than that of industry, reflects an undesirable agrarian economy. Malawi’s ATI of 23 per cent in 2010 reflects low economic transformation³¹³.

In spite of the gains, the country has continued to face macroeconomic pressures, reflected in inflation, exchange-rate volatility and excessive government domestic borrowing. Inflation acceleexchange-rated to 26.0 per cent in 2013 from 18.4 per cent in 2012. The macroeconomic challenges faced by Malawi were exacerbated by the revelation in September 2013 of the looting of public funds through the Integrated Financial Management System (IFMIS), known as “cash-gate”. Donors suspended budget support, leading to a widening of the fiscal gap.

Malawi, in the 2014 World Bank’s Ease of Doing Business Index, fell from 161 in 2013 to 171 out of 189 countries in 2014. The fall occurred in the following areas: starting a business (149 from 142); dealing with construction permits (173 from 168); getting credit (130 from 126); paying taxes (81 from 55) and resolving insolvency (150 from 136). There was minimal or no change in getting electricity, protecting investors, trading across borders, and enforcing contracts. Improvement was registered in registering property, resulting from reduction in stamp duty.

Under the GCI, 2013/14, Malawi is ranked 136 out of 148, largely because of a weak and unstable macroeconomic environment characterized by high inflation and constrained foreign-exchange reserves.

313 African Centre for Economic Transformation (ACET), African Transformation Report: Growth with Depth, 2014; Accra, Ghana.

Infrastructure is poorly rated by international standards; the education system remains inadequate; and there is a high rate of communicable diseases. See figure V.24. However, the country ranks favourably at 39 with regard to labour-market efficiency. Its financial market is also relatively efficient. While reliability of its institutions has been weakening recently, it was ranked 76 in 2013/14. It dropped in ranking on the Transparency International Corruption Perception Index from 88 in 2012 to 91 out of 177 countries in 2013.

Figure V.21 Malawi GCI Pillars by Rank, 2013-2014

76

Source: World Economic Forum, Global Competitiveness Report, 2013-2014.

Malawi’s export basket is dominated by primary commodities but, with globalization, opportunities for exports of processed products have emerged. The country has not yet repositioned itself to exploit opportunities to integrate into GVCs. Obstacles to integration into GVCs include poor infrastructure, low skills and a weak business climate. The main export commodity is tobacco, which accounts for 60 per cent of foreign exchange earnings. Other key export commodities include tea, sugar, cotton and uranium. Because of concentration on low-value primary commodities, the benefits to Malawi from globalization are limited. Malawi’s production and supply capacity is limited; hence, the country’s high import dependence.

The financial sector has limited outreach and is relatively small and concentrated. Only 19 per cent of the population have access to banking services, while a mere 3 per cent use insurance products. In the 2014 World Bank Ease of Doing Business survey, Malawi’s ranking on ease of getting credit slipped from 126 to 130. Access to finance for SMEs is a major challenge, especially when it is a question of accessing long-term finance.

Banks are unwilling to lend to SMEs (which make up the largest number of private sector actors) because of the perceived risk associated with this market segment, lack of conventional forms of collateral and lack of information on credit history to monitor borrowers. Medium-term and long-term project financing are also not readily available in Malawi. Non-banking financial institutions are emerging, including micro and savings institutions, and their importance in the financial system is likely to grow. Currently, financial intermediation is characterized by high lending rates.

Poverty, inequality and human development

While Malawi has registered positive economic growth for much of the past decade, progress in poverty reduction has been limited. According to the 2012 Integrated Household Survey (IHS) report, poverty level was reduced marginally from 52.4 per cent in 2005 to an estimated 50.7 per cent in 2011. In 2013, Malawi had very low human development levels, with the third lowest HDI in SADC, 0.414³¹⁴. It ranked 174 out of 187

314 UNDP, Human Development Report, 2014

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countries. Income inequalities are also relatively high with an income Gini coefficient of 0.44 in 2010³¹⁵. When the HDI was adjusted for income inequality, the index slipped down to an IHDI of 0.282. In 2013, the country had a GDI of 0.891, a GII of 0.591 and an MPI of 0.332 in 2010.

According to the Malawi Demographic and Health Survey (MDHS, 2010), mortality rates for children under-five declined from 133 deaths per 1 000 live births in 2004 to 112 deaths in 2010, while infant and child mortality rates declined from 76 and 62 deaths per 1 000 live births to 66 and 50 deaths per 1 000 live births, respectively.

These health gains resulted from expanded access to antenatal care, a fall in cases of chronic malnutrition, and an expansion in vaccination rates. Malawi has also managed to reduce incidents of major diseases, including malaria. While progress on HIV/AIDS has been made, the prevalence rate (10.6 per cent) is still relatively high.

Life expectancy increased to 53 in 2012 from 38 in 1995. According to the United Nations MDG Database, Malawi has a relatively high MMR which fell from a four-digit level of 1 100 deaths per 100 000 live births in 1990 to 460 in 2010. Urban areas fare better than rural areas across these health indicators.

Educational outcomes are low even by regional standards. Nevertheless, notable progress in school enrolment has been registered over the past decade. NERs increased from 58 per cent in 2000 to 83 per cent in 2012, while completion rates up to grade 5 increased from 65 per cent in 2000 to 73 per cent in 2010. The gender parity in secondary schools is only 0.79. The low quality of education is another major challenge. Literacy rate is estimated at 62 per cent (69 per cent for men and 59 per cent for women). Overall, the education sector faces significant challenges, including a high pupil-teacher ratio of 76:1 (up to 100 children in some classes) and high repetition and drop-out rates. At 20 per cent in primary education, repetition rates are among the highest in Africa, translating into poor and irrelevant education.

Only 10 per cent of women, compared to 18 per cent of men, are in wage employment. Most of Malawi’s labour force is employed in the non-formal sector.

Government efforts, policies and actions

The 49 per cent devaluation of the Malawian kwacha in May 2012 and the shift towards a market-based exchange rate regime boosted the competitiveness of Malawi’s cash crops. Driven by improved auction prices, tobacco production increased from 79.8 million kg in the 2012 season to 168.6 million kg in 2013. The reforms in the tobacco industry, including adoption of contract farming, contributed to the good tobacco harvest in 2013. By contrast, output of maize, the staple food, increased by only 1.6 per cent because of drought conditions in some parts of the country. Although Malawi recorded a national maize surplus, estimated at 560 000 tonnes, for the eighth consecutive year, 21 drought-affected districts were declared food-insecure.

The macroeconomic reforms pursued by Malawi under the Economic Recovery Plan (ERP) began to yield results as evidenced by improved foreign exchange availability and better incentives for producers of export commodities. The country has committed itself to reducing non-tariff barriers (NTBs) to regional trade.

Currently, potential exporters have difficult exporting to neighbouring countries because of the requirements for export licences, and inflexible rules relating to phytosanitary standards.

As a landlocked country, Malawi faces high transport costs and experiences delays in transit and the clearance of goods at the border. The country is developing regional transport corridors and implementing programmes to harmonize trade regimes and transit procedures with neighbouring countries. The development of the Nacala transport corridor with Mozambique (both road and rail) is expected to reduce transport costs significantly and improve connectivity to markets. The Government is undertaking trade facilitation measures within the framework of SADC and COMESA, which include establishment of one-stop border posts and creation of a national single window.

Malawi is also participating in an accelerated programme on economic integration, an initiative agreed upon with Mauritius, Mozambique, Seychelles and Zambia to fast-track regional integration. The Government

315 Available from http://www.quandl.com/demography/gini-index-all-countries.

is implementing the National Export Strategy (NES), with a view to enhancing export competitiveness and promoting exports of processed agro-products to feed into regional and global value chains.

To curb inflation, the Reserve Bank of Malawi (RBM) maintained a tight monetary policy stance. In December 2013, the central bank introduced a Lombard Facility in order to assist banks to improve liquidity management.

Malawi’s official foreign exchange reserve position improved significantly on the back of a good tobacco season.

During the tobacco season, the RBM intervened actively in the foreign exchange market to build reserves while tightening monetary policy to mop up liquidity. Gross official reserves stood at US$ 402.4 million in December 2013, equivalent to 2.1 months of import cover compared to US$ 134 million in December 2012, equivalent to one month’s import cover.

In response to the scandal, the Government is implementing, with the support of donors, a comprehensive action plan to correct weaknesses in public finance management (PFM). The financial scandal has underscored the urgent need for Malawi to redouble efforts to improve accountability and transparency in the public sector. Malawi held its fifth multi-party democratic elections in May 2014, which was won by the opposition Democratic Progressive Party and this is likely to lead to a change in policies.

The fiscal position deteriorated in 2012 because of an expansionist fiscal policy and a shortfall in donor financing and tax revenues. The Government adopted corrective fiscal adjustment measures for the 2012/13 fiscal year, as part of the Extended Credit Facility Programme with the IMF. The bulk of the budget (70 per cent) was allocated to the Malawi Growth and Development Strategy (MGDS II) priority areas, including the social sector and food security. The 2012/13 budget was executed against the backdrop of macroeconomic challenges, particularly the sharp depreciation of the kwacha, rising inflation and high interest rates.

Malawi’s external debt stock has grown since it qualified for debt relief under the Highly Indebted Poor Countries/ Multilateral Debt Relief Initiative (HIPC/MDRI) in 2006. The debt stock, which amounted to US$

488 million at HIPC completion in 2015 increased to US$ 1.4 billion (23 per cent of GDP) in June 2013. The country has established an institutional and policy framework for external debt management. Under existing debt policy, non-concessional borrowing is restricted.

Business climate reforms have been implemented, at a slow pace, under the Business Environment Strengthening and Technical Assistance Programme (BESTAP), with the aim of improving the regulatory environment.

Parliament also enacted the Investment Promotion Act allowing for the creation of a one-stop centre under the Malawi Investment and Trade Centre (MITC). The Government is pursuing reforms to promote financial inclusion and has enacted new laws such as the Credit Reference Bureau Act, Pension Fund Act and Financial Co-operative Act. Incentives are being provided to encourage mobile banking to expand access to financial services and lower costs of transactions for banks.

Improvement in health outcomes is supported by such initiatives as the National Reproductive Health Strategy, Integrated Management of Child Illnesses (IMCI), the Essential Health Package and distribution of mosquito nets under the Health Sector Wide programme – Health SWAp. In September 2011, the Government adopted the health sector strategic plan 2012-2016 (HSSP), which has been endorsed by development partners.

The country has put in place a National Education Sector Plan (NESP 2008), which serves as the overarching policy framework. While the free primary education policy has helped increase enrolment from 1.9 million to about 3 million, inadequate investment in personnel and infrastructure has affected the quality of primary education. Social protection programmes targeted at vulnerable groups include the Farm Input Subsidy Programme (FISP), the Public Works Programme (PWP) and the Malawi Rural Development Fund (MARDEF).

However, it is recognized that such programmes may not reach the “ultra-poor”, who are marginalized and have no access to land and income. Hence, cash transfers have been adopted as a complementary instrument to support those in extreme poverty.

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Conclusion

Malawi faces challenges of inflationary pressures, constrained foreign exchange reserves, and dependency on donors for budgetary support. However, the country has huge potential owing to its diverse natural resources such as land, water, forestry and minerals, much of which remain unexploited. More efforts are needed to reduce reliance on rain-fed agriculture through irrigation complemented by productivity- enhancing investments.

The main short-term challenge for the Government is to consolidate macroeconomic stability and improve governance, while strengthening the enabling environment for private sector investment for sustained and inclusive growth.