Economic studies
Malawi

Malawi

Population 17.6 million
GDP per capita 344 US$
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2012/13 2013/14 2014/15 (f) 2015/16 (f)
GDP growth (%) 5.2 5.7 3.0 3.0
Inflation (yearly average) (%) 28.3 23.8 20.1 14.0
Budget balance (% GDP) -15.9 -13.1 -11.9 -8.1
Current account balance (% GDP) -15.0 -11.7 -11.1 -10.3
Public debt (% GDP) 72.1 75.8 60.2 56.9

 (e) Estimate (f) Forecast *Fiscal year from July to June *Excluding grants

STRENGTHS

  • Natural resources (uranium, rare earths, tobacco, oil)
  • Booming services sector
  • Support  from donors
  • Member of SADC (Southern African Development Community) and COMESA (Common Market for Eastern and Southern Africa)

WEAKNESSES

  • Economy dominated by agriculture, vulnerable to climatic conditions
  • Inadequate infrastructures (water, energy)
  • Low foreign exchange reserves
  • Extreme poverty on the increase
  • High inflation

RISK ASSESSMENT

Growth driven by agriculture and services

Malawi suffered a slowing in its economic growth in 2015 following the floods at the beginning of the year, resulting in a food crisis. Whilst it remains conditional on favourable weather conditions, the increase in tobacco production and other agricultural crops should help drive growth in 2016. In addition, the expansion of the tertiary sector, particularly with the introduction of new technologies such as mobile banking services, should also help boost activity. Elsewhere, despite the suspension of uranium production in Kayelekera since 2014, the discovery of new mineral deposits should improve the outlook for the sector. The industry continues to suffer from a lack of infrastructure, especially for energy supplies. The reduction in public spending and investment, because of delays in aid disbursements, will restrict growth. Demand will continue to suffer under the impact of high inflation and high interest rates.
With soaring food prices and higher electricity prices, inflation stayed at a high level of around 20% in 2015. With the normalisation of food supplies and the continued fall in world commodity prices, it should slow further in 2016.

A precarious financial situation with the withdrawal of aid

Although the Malawian economy is largely dependent on international aid, most donor countries decided to suspend or delay their contributions to the financing of the budget following the embezzlement scandal that overtook the government in October 2013. In dealing with the decline in aid, the government has adopted an austerity budget for 2015/2016. It is hoping to increase its revenues through administrative reforms and limit its spending, specifically through reducing agriculture subsidies and public sector wages. The implementation of these austerity measures will be problematic in a context of food shortages and higher wage claims from public sector employees facing high inflation. The receipt of a tranche of aid from the IMF at the end of 2015 as part of the extended credit facility should help bolster the budget and encourage a gradual return of donors.

The current account deficit, also carried by aid, is expected to contract whilst remaining high. The country’s exports should start picking up again in 2016 thanks to the recovery of agricultural production and despite lower tobacco prices. At the same time, growth in imports should be limited by the slowdown in investments, low commodity prices and the weakness of demand.
Currency reserves, equal to three months’ imports, have increased slightly but remain low. In the context of the floating exchange rate introduced in 2012, downwards pressures on the kwacha are likely to continue, as the current account deficit is still large and FDI flows remain small.

A government that needs to rebuild the trust of the public and donors

In a country where a feeling of defiance towards institutions dominates, there are plenty of challenges facing the President, Peter Mutharika, and the ruling coalition of the Democratic Progressive Party (DPP) and the United Democratic Front (UDF). Ever since the corruption scandal in 2013, the high cost of living and the inadequacies of governance and public services have led to discontentment and fears of the permanency of the political and social fragility. This latter, combined with the lack of a parliamentary majority for the ruling coalition, will continue to hinder the implementation of major economic reforms.
The tense relations between the President and the leading international partners, as well as concerns from all about the management of public finances is resulting in the country looking for external support from other countries such as India and China. The support of the IMF should, however, foster a gradual return by donors. Relations with Tanzania remain tense because of the disagreement over the Lake Malawi borders. Tensions along the border with Mozambique have revived following clashes between the Renamo rebel movement and government forces, resulting in huge local population movements towards Malawi.
The government has made efforts to attract private investors, including the reform of the State-owned electricity supplier, Electricity Supply Corporation, scheduled for 2016, as well as the proposed road link between Zambia, Malawi and Mozambique financed by the African Development Bank. The business climate will however remain impaired and the country is classed 141st out of 189 countries in the World Bank’s Doing Business ranking 2016.

 

Last update: January 2016

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