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Malawi Economic Monitor Summary - June 2021

Core Content

The Malawi Economic Monitor (MEM), June 2021 edition, provides an analysis of economic and structural development issues in Malawi, with a particular focus on the impact of the COVID-19 pandemic and the need for digital transformation to support sustainable and inclusive growth.

Main Views

• Economic Impact of the Pandemic:
  The pandemic significantly slowed economic growth in 2020, with the GDP growth rate estimated at 0.8%, far below pre-pandemic projections of 4.8%. The impact was most pronounced in the services and industry sectors, due to disruptions in global value chains, reduced tourism, and lower remittances. However, a strong agricultural harvest partially offset this decline.

• Agricultural Performance:
  Maize production is expected to increase to 4.5 million tons in 2021, a 17% rise over 2020. The Affordable Inputs Program (AIP) has played a crucial role in supporting this growth, but it also poses risks due to its high fiscal cost and potential over-spending if fertilizer prices rise.

• Fiscal Deficit and Debt:
  The fiscal deficit for FY2021 is projected at 8.7% of GDP, and it is expected to increase to 9.4% of GDP in FY2022. This is driven by high government expenditure on wages, interest payments, and subsidies. Domestic debt is rising sharply, with projections that it could exceed 30% of GDP by the end of FY2021. The external debt-to-GDP ratio is also expected to increase due to exchange rate depreciation and pandemic-related financing needs.

• Monetary Policy and Exchange Rate:
  The Monetary Policy Rate (MPR) was maintained at the same level since November 2020. The kwacha has depreciated against the US dollar, contributing to import inflation and higher external borrowing. However, the depreciation is expected to improve export competitiveness in the medium term.

• Digital Transformation as a Key Strategy:
  The Malawi 2026 Digital Economy Strategy outlines the Government's vision for a more inclusive and efficient digital economy. The strategy emphasizes digital infrastructure, platforms, financial services, skills development, and entrepreneurship as critical areas for investment. Despite progress in ICT policies, broadband infrastructure, and digital public platforms, Malawi has not yet fully realized the potential of its digital economy.

• Digital Economy Potential:
  Studies suggest that a 10% increase in mobile broadband penetration could boost GDP by US$189 million and tax revenues by US$33 million annually. However, low electrification, high internet costs, and lack of digital skills remain major barriers to leveraging this potential. The National Registration and Identification System (NRIS) has been a notable success, enabling financial inclusion and digital service delivery.

• Challenges and Risks:
  The pandemic continues to pose risks to economic recovery, particularly through limited vaccine availability and low uptake, which sustain social distancing measures. Macroeconomic imbalances, including high domestic debt, fiscal deficits, and persistent trade deficits, are expected to hamper growth in the medium term. Public debt servicing costs are rising, and domestic borrowing is increasing, reducing fiscal space for investment.

• Policy Recommendations:
  The report calls for bold reforms in four key areas:

  1. Continuing pandemic containment to reduce vulnerability to future waves.
  2. Reducing fiscal deficits and domestic debt through improved public finance management and sustainable spending.
  3. Promoting economic diversification and growth, particularly through digital transformation and agricultural commercialization.
  4. Investing in shock-responsive social protection systems and climate resilience to support vulnerable populations and reduce fiscal risks.

Key Information

• Fiscal Deficit: 8.7% of GDP for FY2021, expected to rise to 9.4% for FY2022.
• Domestic Debt: Projected to exceed 30% of GDP by the end of FY2021.
• Agricultural Growth: Maize production is expected to increase by 17% in 2021, but fertilizer subsidies and weather shocks remain risks.
• Digital Economy: The Government has launched NRIS, mobile money initiatives, and ICT strategies, but challenges in access, affordability, and skills persist.
• Digital Infrastructure: 88% of the population has access to 3G or 4G signals, but broadband affordability and connectivity remain issues.
• Social Protection: The report emphasizes the need to modernize and expand social protection systems to better respond to future shocks.

Conclusion

The Malawi Economic Monitor underscores the importance of digital transformation in driving economic growth and resilience. It highlights the need for fiscal discipline, policy reforms, and investment in infrastructure and skills to ensure sustainable development. The report also stresses the importance of public-private partnerships, transparent trade policies, and enhanced public finance management in achieving these goals.