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Malawi Economic Monitor Summary - June 2019

Core Content

The Malawi Economic Monitor (MEM), published in June 2019, provides an in-depth analysis of Malawi's economic developments, macroeconomic outlook, and policy recommendations for the incoming administration. The report highlights both progress and challenges, emphasizing the need for structural reforms to achieve sustainable and inclusive economic growth.

Main Economic Developments

• Real GDP Growth: Malawi's real GDP growth slowed from 4.0% in 2017 to 3.5% in 2018, primarily due to a poor maize harvest caused by dry spells and Fall Army Worm infestation. However, the growth rate is projected to rise to 4.5% in 2019 and 5.0–5.5% in the medium term.
• Inflation: Overall inflation remained stable at 8.9% as of May 2019, with non-food inflation decelerating to 5.7%, one of the lowest in years. The Malawi Kwacha remained stable due to tight monetary policy.
• Fiscal Deficit: The FY2018/19 fiscal deficit was 5.8% of GDP, exceeding the budgeted target of 3.8% and the previous year's 7.8%. This was due to lower-than-expected revenues and grants, and higher-than-expected recurrent expenditure, especially from election-related spending.
• Domestic Debt: Domestic debt has been rising, with interest payments accounting for 3.6% of GDP, crowding out discretionary spending. The fiscal deficit is expected to remain high due to the impact of Cyclone Idai.
• Cyclone Idai Impact: The storm affected 17 geographical areas, impacting 975,588 people, displacing 90,000, and causing 60 deaths. The economic impact is estimated at US$220.2 million, with the highest effects on the social sector (59.2%), followed by infrastructure (23.4%) and productive activities (17.4%). The storm exacerbated poverty and had significant impacts on households' assets, health, and education services.
• Exports: Malawi's export base remains heavily dependent on tobacco, which is primarily grown in areas not affected by Cyclone Idai.

Macroeconomic Outlook and Risks

• Challenges: The economy remains vulnerable to external and domestic shocks, with high risks due to climate variability, fiscal imbalances, and financial sector stress.
• Recommendations:
  • Diversify the economy and increase fiscal restraint to reduce vulnerability.
  • Implement policy and institutional reforms to drive sustainable growth.
  • Strengthen macroeconomic and fiscal policies to support stability and growth.
  • Improve governance and public service delivery to enhance efficiency and reduce corruption.
  • Enhance decentralization and fiscal transparency to improve service delivery and resource management.

Special Topic: Charting a New Course

The report outlines four key policy areas for the incoming administration to foster a vibrant economy and job creation:

1. Establish Foundations for Growth

• Strengthen macroeconomic and fiscal policies.
• Improve governance and public service delivery.
• Ensure fiscal discipline and exchange rate stability.
• Enhance SOEs oversight and dividend payments.
• Promote integrity and accountability within the public sector.

2. Transform the Economy and Increase Growth

• Coordinate cross-government reforms to improve the business environment.
• Reduce costs of doing business and promote SMEs.
• Improve trade policies to enhance production and exports.
• Enhance efficiency and governance in energy and water sectors.
• Introduce prepaid meter policies to improve revenue collection.

3. Strengthen Human Capital

• Fast-track education reforms to improve access and quality, especially in remote areas.
• Scale up family planning and reproductive health services to reduce fertility rates.
• Enhance maternal and child health through expanded antenatal care, breastfeeding promotion, and parenting education.

4. Develop Resilience to Shocks

• Expand social safety nets with a national financing strategy.
• Implement policies to address environmental degradation and climate risks.
• Strengthen disaster risk management (DRM) and land use policies to build resilience and reduce fiscal risks.

Key Challenges and Opportunities

• Malawi continues to be stuck in a poverty trap, with uneven human development and limited progress for the bottom 40%.
• Fiscal consolidation is needed to reduce deficits and debt levels, especially with the increasing domestic debt and high interest costs.
• The incoming administration has a generational opportunity to break the cycle of crisis and vulnerability.
• Private sector investment and agricultural transformation are crucial for job creation and economic diversification.

Conclusion

The Malawi Economic Monitor underscores the importance of macroeconomic stability, fiscal discipline, institutional reform, and human capital development for sustainable growth. The report recommends a strategic shift in policy focus to move Malawi towards inclusive and resilient development, leveraging both internal and external opportunities while mitigating risks from climate shocks, fiscal imbalances, and governance challenges.