* As published in its 18th edition of the Malawi Economic Monitor, which was presented at a stakeholders forum on February 27
* Malawi Economic Monitor provides an analysis of the country’s economic and structural development issues
By Duncan Mlanjira
The World Bank says Malawi has now taken bold steps to stabilize the economy but 2023 saw low growth, whose macroeconomic imbalances is expected to continue into 2024.
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In its 18th edition of the Malawi Economic Monitor, which provides an analysis of Malawi’s economic and structural development issues, the World Bank observed that the economy is estimated to have grown by only 1.6% in 2023.
“The resumption of energy production at the Kapichira hydroelectric power plant has improved access to electricity and supported economic activity, particularly in the industry and services sectors.
“However, production inputs across sectors were often unavailable throughout 2023 due to foreign exchange shortages, dampening growth. Following Cyclone Freddy, agricultural output in 2023 was only marginally larger than in 2022.
“Rapid inflation and foreign exchange shortages throughout the year contributed to a weak business environment, further undermining economic growth,” says the report’s overview, whose full analysis was presented at a stakeholders forum at Ryalls Hotel in Blantyre on February 27.
The publication is part of the ongoing series published twice each year and it intends to foster better-informed policy analysis and debate regarding the key challenges that Malawi faces in its endeavour to achieve inclusive and sustainable economic growth.
It continues to say: “Recent exchange rate reforms are yet to translate into increased liquidity in formal foreign exchange markets. While the 2012 exchange rate liberalization led to an immediate uptick in foreign exchange trading among authorized dealers, liquidity levels have remained stagnant following the November 2023 exchange rate reforms.
“Uncertainty about the new exchange rate regime and the reemergence of spreads against parallel markets after the depreciation likely reduce the incentive for market actors to formalize foreign exchange transactions.
“Rapid price increases and limited employment options have led to a rise in food insecurity and poverty in Malawi. Many Malawians feel the squeeze from the scarcity of available jobs and pressure on real wages.”
The report further observes that in 2023, “approximately 71.7% of the population were estimated to be living below the international poverty line” and that one in five “are expected to experience crisis-level food insecurity during the lean season, with profound implications for human development outcomes, including mental health”.
“The food security situation is particularly tense in the southeastern region of the country.”
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On imports, the World Bank reports that they have remained steady despite low foreign exchange liquidity in the formal market: “Significant revisions in trade data in 2023 show that imports have remained stable in US$ terms during the period of foreign exchange shortages, which started in mid-2022.
“Increased support from development partners likely played a significant role in alleviating the impacts of the current crisis. Nevertheless, due to elevated international commodity prices, Malawi still imported fewer liters of fuel and fewer bags of fertilizer than before the crisis.
“The exchange rate adjustment appears to be contributing to limiting non-essential imports — a necessity for reducing Malawi’s trade deficit over the medium term.”
The publication described the re-alignment of the kwacha as a “delayed” decision, saying it contributed to inflationary pressures: “In December 2023, headline inflation surged to 34.5%, up from 26.9% in October 2023, before the devaluation.
“This marked a reversal of the declining inflation trend observed between August and October 2023. The increase in inflation has been particularly driven by a rise in food inflation, climbing from 34.5% in October to 43.5% in December 2023.”
On the fiscal deficit, the report analyses that it is narrowing for the first time in six years, adding that “over the past decade, increased government spending has pushed government financing requirements to unsustainable levels, but there is now a notable shift towards fiscal consolidation”.
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“Financing of the fiscal deficit has resulted in major debt vulnerabilities and a crowding out of private sector credit. Ongoing government efforts aimed at consolidating public finances are expected to play a role in curbing borrowing.
“Reforms in revenue collection, supported by budget support, are expected to reduce the fiscal deficit to 7.4% of GDP, the first reduction in six years, though this excludes the statutory Reserve Bank of Malawi (RBM) recapitalization — following the November 2023 devaluation.
“Public and publicly guaranteed debt remains in distress and unstainable, requiring timely and substantial debt restructuring. The stock of public debt is estimated to have increased from 75.7% of GDP in 2022 to 81.3% in 2023.
“The government is encountering difficulties in securing financing from the domestic market, with subscriptions falling below requirements in most security auctions. The November 2023 joint World Bank-international Monetary Fund (IMF) Debt Sustainability Analysis reported that both external and overall public debt remain in distress and are unsustainable under current policies.”
“The government is pursuing external debt restructuring, having received financing assurances from China and India in late 2023, which have provided momentum that debt relief can be achieved.
“Agreement with these official creditors, along with progress in negotiations with Malawi’s commercial lenders, will be key for achieving debt sustainability over the medium term.
The Reserve Bank of Malawi
On RBM’s adjustment of the official exchange rate by 44%, the publication maintains that the decision promised to increase kwacha flexibility, and has further tightened monetary policy.
“The RBM introduced additional measures to increase the flexibility of the kwacha. This revision, announced on November 9, 2023, shifted the selling rate from MWK1,180 to MWK1,700 per US$, marking a departure from a period of fixed exchange rate management and diminishing foreign exchange reserves.
“Since the 25% adjustment in May 2022, the official rate had remained largely unchanged, while the parallel rate continued to rise.
“The spread between the official and parallel market exchange rate peaked in August 2023 at 63%. The RBM viewed the adjusted US$-Kwacha rate as market-clearing, aligning it with market fundamentals and mitigating arbitrage opportunities.
“Following the devaluation, the RBM announced plans to increase the frequency of foreign exchange auctions and permit intermediaries to trade at freely negotiated rates. However, the implementation of these measures remains limited.
The report goes on to indicate that the RBM has tightened monetary policies to contain inflationary pressures and that its Monetary Policy Committee responded to high inflation by raising the policy rate twice in 2023, from 18%to 24%, and again early 2024 to 26%.
“While money supply growth remained high, it decelerated from its peak of 38.8% in December 2022 to 28.3% in October 2023. Subsequently, due to revaluation gains resulting from the exchange rate adjustment, money supply increased to 32.2% year-on-year in December 2023.
“Additionally, the yields of both seven-year and ten-year Treasury Notes increased by 450 basis points over the course of the year,” says the report.
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