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Malawi Economic Monitor Summary - October 2016

Core Content

The Malawi Economic Monitor (MEM), published in October 2016, provides an analysis of economic and structural development issues in Malawi. It highlights the challenges posed by a second consecutive year of drought, leading to food insecurity and economic stagnation. The report also addresses the broader context of economic growth in Sub-Saharan Africa and explores policy options to enhance resilience and reduce poverty.

Main Economic Developments

1. Economic Growth and Structural Challenges

• GDP Growth: Malawi is projected to grow at 2.5% in 2016, lower than the population growth rate of 3.1%, resulting in a decline in average living standards.
• Agricultural Sector: The sector, which accounts for 30% of GDP and employs 85% of the workforce, has seen a decline in production due to consecutive droughts. Maize production fell by 14.7% in 2016, following a 30.2% drop in 2015.
• Industrial and Service Sectors: Industrial growth is expected at 2.4%, while the service sector is projected to grow at 4.4%.
• Economic Vulnerability: Malawi's economy is particularly vulnerable to weather shocks due to frequent and severe droughts, high population growth, and environmental degradation.

2. Fiscal Challenges

• Fiscal Deficits: The fiscal deficit for FY 2016/17 is projected at 4.1% of GDP, a slight improvement from 4.3% in FY 2015/16.
• Debt Constraints: Malawi's debt levels have limited its fiscal space to respond to the crisis, necessitating support from development partners.
• Public Expenditure: Efforts to consolidate public expenditure have had some success, but the Government still faces pressure from rising debt service costs, public sector wage demands, and costly subsidy schemes.
• Domestic Borrowing: Domestic borrowing has exceeded targeted levels, contributing to inflationary pressures.

3. Inflation and Exchange Rate

• Inflation Trends: Inflation accelerated in June and July 2016 due to rising food prices, but stabilized by September at 21.2%, with an annual rate of 22.5%.
• Exchange Rate: The Kwacha has depreciated more sharply than usual, while the US dollar remains stable, increasing the cost of imports.
• Monetary Policy: The Reserve Bank of Malawi has maintained a tight monetary policy, which has helped contain non-food inflation.

4. Trade and Investment

• Export Decline: Exports have declined, mirroring the drop in tobacco sales.
• Terms of Trade: Improved terms of trade have reduced the cost of imports, but global commodity prices remain low.
• Private Sector: Investor confidence is subdued due to high inflation, interest rates, and unreliable infrastructure (power and water outages).

Special Topic: Poverty and Vulnerability

1. Human Development Progress

• Positive Trends: Access to primary education has improved, child malnutrition has declined, and under-five mortality has reduced.
• MDGs Achievement: Malawi has achieved four out of eight Millennium Development Goals.
• Poverty Reduction: Poverty reduction in rural areas has been modest and fragile, with about 56% of the rural population still classified as poor.

2. Persistent Poverty and Vulnerability

• Rural Poverty: Rural poverty remains high and stagnant, with 2.4 million of the 2.6 million chronically poor living in rural areas.
• Food Insecurity: 84% of rural poor households reported food insecurity in 2013, up from 67% in 2010.
• Vulnerability Factors: Rural households are highly exposed to weather and health shocks, with limited capacity to cope. Social safety nets and insurance mechanisms are insufficient.

3. Agricultural Productivity and Poverty

• Productivity Gains: A 10% increase in agricultural productivity led to a 1.3% rise in per capita consumption in agricultural households.
• Maize Yields: Maize yields for poor households were 31% lower than for non-poor households in 2010–2013.
• FISP Reforms: The Farm Input Subsidy Program (FISP) has been reformed to reduce subsidies and increase private sector involvement, but has not significantly improved productivity for poor farmers.

4. Non-Farm Income and Social Protection

• Non-Farm Participation: Participation in non-farm sectors, particularly self-employment, has played a key role in poverty reduction.
• Social Safety Nets: Coverage of government social protection programs remains limited, and leakage rates are high. Only 40% of beneficiaries of the two largest programs are poor.

Key Recommendations

• Stabilize Macroeconomy: Establish macroeconomic stability to encourage investment and growth, and protect pro-poor spending.
• Improve Agricultural Productivity: Accelerate reforms to the FISP and promote complementary investments in agriculture (fertilizer, seeds, extension services).
• Enhance Fiscal Discipline: Improve budget execution and public financial management to increase fiscal buffers and reduce reliance on off-budget spending.
• Promote Structural Transformation: Encourage orderly urbanization and diversify the economy to reduce dependence on agriculture.
• Strengthen Social Protection: Expand coverage of social safety nets, improve targeting, and reduce leakage to better support vulnerable populations.

Conclusion

Malawi faces significant challenges due to consecutive years of drought, which have led to food insecurity, economic stagnation, and limited fiscal space. The report emphasizes the need for policy reforms to build resilience, stabilize the economy, and improve social protection. With a focus on poverty and vulnerability, it outlines pathways to achieve more inclusive and sustainable growth.