Population 16.632 million
GDP 4.49 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
6.5 |
4.3 |
1.9 |
3.1 |
|
Inflation (yearly average) (%)
|
7.4 |
7.6 |
28.3 |
16.2 |
|
Budget balance (% GDP)*
|
-10.3 |
-10.5 |
-12.5 |
-11.6 |
|
Current account balance (% GDP)*
|
-17 |
-11.9 |
-15.7 |
-14.3 |
|
Public debt (% GDP)
|
39.4 |
48.3 |
56.7 |
60.2 |
| (e) Estimate (f) Forecast | ||||
* grants included
STRENGTHS
- Support of international backers
- Political stability
- Floating exchange rate regime (adopted in May 2012)
- Natural resources (uranium, rare earths)
WEAKNESSES
- Low foreign exchange levels
- High inflationary tensions
- Growth in extreme poverty
- Economy vulnerable to weather conditions (dominance of agriculture)
- Water and electricity infrastructure shortcomings
Risk assessment
Growth hit by adoption of floating exchange rate regime
Growth slowed sharply following the 33% devaluation of the kwacha in May 2012 and the adoption of a floating exchange rate regime. The Reserve Bank of Malawi is hardly able to contain the depreciation of the currency due to a shortfall in foreign exchange reserves, representing barely a month of imports. This is likely to result in a redirection of consumption to domestic goods and faster export growth thanks to greater competitiveness achieved through the kwacha’s depreciation, which fell more than 100% against the dollar in 2012. Apart from this currency shock, electricity and fuel subsidies were lifted resulting in very high inflation felt first by the poor. The proportion of Malawians affected by food insecurity rose by 21% in 2012, while 2 million inhabitants could need food aid in the short term. There is a tangible risk of a huge section of the population falling into extreme poverty. With inflation at very high levels, private consumption will remain depressed due to the economic uncertainties and despite a civil service salary rise of 24% in 2012. Malawi’s economy is mainly focused on the tobacco industry with nearly 70% of the population dependent on its cultivation. Following a record harvest resulting in a collapse in prices, production was regulated by the government in 2012 so as to adapt supply to demand. In 2013, adherence to the production quotas means the sector will hold up well, though the pace of growth will also depend on weather conditions. Owing to a lack of foreign currency, the private sector will continue to suffer from difficulties with the fuel supply. In the medium term, growth will mainly be driven by rising uranium production (started in 2009) and start drilling for rare earths. Oil extraction at Lake Malawi remains suspended pending environmental analysis and resolution of the territorial conflict with Tanzania.
Extremely weak financial position
The country’s inability to implement the IMF programme and the authoritarian regime of Former President Mutharika (especially after the July 2011 clashes in which 20 civilians were killed) led to a suspension of international aid, exacerbating the pressure on public finances and on the external accounts. Under Joyce Banda’s presidency, aid was restored with the adoption of a floating exchange rate regime. Nonetheless, the fiscal balance will remain in deficit despite the IMF Extended Credit Facility arranged in July 2012, financing from other international financial backers and the freeze on public investment. Regarding the external accounts, the current account balance post a large deficit due to the economy’s poor degree of diversification. Moreover, the balance of services deficit will remain due to the repatriation of profits from the mining sector, hampered by an erratic electricity supply. The banking system is relatively developed but has been hit by the kwacha’s devaluation. Malawi’s Central Bank intervened to ensure funding for the banks and thereby prevent the risk of a credit crunch triggered by strong foreign currency demand. Access to credit will be problematic in 2013 and curb the development of the private sector. Finally, Malawi’s economy will be exposed to a major financial crisis if the country cannot rebuild its foreign exchange reserves despite the IMF aid.
Political stability ensured by the interim President Joyce Banda
President Mutharika died in 2012 aged 78 following a heart attack. Joyce Banda, the Vice President, took office in accordance with the constitution. She will act as interim President until the next presidential elections in May 2014. This transition has been welcomed with a degree of optimism as to the country’s future. However, political stability is relative as high inflation has set off popular discontent. Meanwhile, since her coming to power, many loyalists faithful to the former President have been dismissed (information Minister, director of main public media company) which has made her enemies. Apart seeking reconciliation with donors, the new President is also basing policy on boosting private investment. However, the business environment is hampered by weak infrastructures and ineffective public institutions.
