MCP Government facing fiscal consolidation challenges in managing the Malawi economy—AFORD’s national director for economic affairs Chifipa Mhango

RBM, the government banker and advisor

* With the growing need for foreign currency, and the country reaching stressful levels of import cover of 15 days or 0.5 months

* The only option on the table under the prevailing tough economic environment would be further devaluation of the Malawi Kwacha soon

By Duncan Mlanjira

Alliance for Democracy (AFORD) national director for economic affairs, Chifipa Mhango, who is Chief Economist for Don Consultancy Group (DCG), maintains that the Malawi Congress Party (MCP) Government “is facing fiscal consolidation challenges in managing the economy, with import cover, a key forex position indicator also reaching very stressful levels, at 0.5 months or 15 days import cover, among the lowest in years”.

In analysing the latest data gathered through the Reserve Bank of Malawi (RBM), Mhango says “the picture shows a widening budget deficit, meaning a growing government expenditure compared to revenue and massive accumulation of government debt, at over 80% share of the country’s GDP”.

“Government total expenditure has escalated from MK1.8 trillion in 2020 to reaching a record of MK3.3 trillion in 2023,” he said. “In the first eight months of 2024 to August, government expenditure is already at MK3.6 trillion, which is way above the full total of 2023.

“More concerning is the recurrent expenditure of MK2.7 trillion in this first eight months of 2024, representing a 75.1% share of expenditure towards administrative costs and only 24% on development projects.”

He further said “much as the government total revenue increased from MK1.3 trillion in 2020 to MK2.9 trillion, due to some tax increase, thus bringing budget deficit level slightly down by MK100.2 billion to reaching MK402.2 billion in 2023, the first eight months of 2024 to August are showing some worrisome signs”.

“Government budget deficit in these first eight months of 2024 has already surpassed the total of 2023, reaching MK769.2 billion — a clear indication of fiscal pressures, and non-adherence to austerity approach in spending.”

He thus alerted Malawians to “brace themselves for tough times ahead, if the current situation does not improve”, adding that “the economy is failing to attract the much-needed investment.

“On the Global Competitiveness index, Malawi remains below 50 index point, which reflects one of a lowest ranked country when it comes to competing internationally for investment.

“This means, the ability to attract foreign direct investment into the economy is a challenge, based on the 12 measurement pillars, with the most important including: institutions; infrastructure; ICT adoption; macroeconomic stability; health; skills; product market; labour market; financial system; market size; business dynamism; and innovation capability.“

Mhango further indicated that “the issues of infrastructure such as energy reliability, poor road network — especially into rural areas with potential agriculture and mining productive means and tourism attraction potential; and railway system that is not connecting the entire country, is a major concern for Malawi as viewed by the international investors”.

“The level of Foreign Direct Investment into Malawi is still not growing enough relative to our neighbouring countries in the region; and still below US$200 million in 2023.”

The Chief Economist raised further concern that — as indicated in his previous statement, “Malawi faces a challenging monetary policy environment, with the bank policy lending rates from the RBM rising from 12% in September 2021 to current levels of 26%, and overall inflation rate that surged from 8.9% to current 34.3%, and food inflation rate from 10.9% to current 43.5% during the same period.

“The country’s international trading position shows a worsening prolonged international trade deficit position, from MK1.4 trillion in 2020 to MK2.5 trillion.

“In 2023, the country exported MK1.1 trillion worth of goods but imported more than three times, almost MK3.7 trillion, and this international trade deficit continued into the first eight months of 2024 to August, with MK227.9 billion in the last month, as reflected in the RBM data.”

Mhango clearly outlined that: “The above openly defies the current MCP Government’s Kwacha devaluations that have been implemented with a motivation to boost exports or improve international trade position.

“Under these conditions, it means Malawi economy’s ability to accumulate enough foreign exchange reserves through international trade continues to be eroded, as the country trade position continues to be skewed towards importing than exporting — thus cementing the position that the country is officially an import consuming economy.”

“Malawi’s total foreign exchange reserves position has suffered terribly as per latest data reported by the RBM, which as of August 2024 stands at MK941.4 billion and reducing the country’s ability to import crucial products such as fuel and fertilizer — as that level implies a 0.5 months or 15 days import cover.”

He expressed a serious concern that the economic policy tool of currency devaluations “is not serving the purpose of boosting exports due to a weak production base and uncompetitive products, with less value addition, but rather devaluations are done to influence forex demand in the market”.

“With the growing need for foreign currency, and the country reaching stressful levels of import cover of 15 days or 0.5 months, the only option on the table under the prevailing tough economic environment as articulated above would be further devaluation of the Malawi Kwacha soon.

“AFORD is already in advanced stages of drafting the appropriate Economic Policy for Malawi to correct — with clear set targets towards implementation on each economic variable that will be action oriented in approach and results driven goals — to be presented through its manifesto launch, as it prepares to be in Government in September 2025.

Malawi can not continue on this current path” concluded Mhango in his media statement copied to Ministers of Finance & Economic Affairs and Information & Digitisation.