Malawi’s economy faces more battering

Windhoek – Malawi’s ailing and donor-dependent economy faces further battering, as poor performance in the key agricultural sector, rising inflation and a widening current account deficit accelerate the country’s economic downturn.
Malawi’s gross domestic product (GDP) is expected to shrink further to below two percent in 2012 from 9.7 percent in 2008.
Even though growth is expected to pick up in 2013 and the agricultural sector is expected to improve on its 2012 poor performance, rising inflation means consumers’ purchasing power will remain subdued during the remainder of this year, market analysts at Standard Bank said.
They say that the surge in cost of living has sparked large-scale public discontent casting the spotlight on President Joyce Banda, who assumed the presidency following the death of former President Bingu wa Mutharika.
Banda is now faced with the intractable challenge of pacifying large-scale public discontent, which needs convincing that her administration’s policies are better than those of the predecessor, ahead of the general elections in 2014.
Selected foreign investment projects such as the construction of the railway line to Mozambique offer an upside to fixed capital investment.
“The external sector remains under pressure, with inflows from development partners (donors) seemingly forming the only source of foreign currency in recent months.
“We estimate the current account expanded significantly in 2012, reaching US$1 billion (20 percent of GDP), but is likely to improve in the course of 2013,” Standard Bank analysts said.
“A surge in inflows from development partners in December 2012 assisted in offsetting the persistently high trade deficit.
“Next to grants, capital transfers by development partners are crucial to the external sector forming the main source of funding for the current account deficit,” the analysts said.
Despite the donor funds trickling in, Malawi’s “overall balance of payments remains precarious, with foreign exchange reserves set to remain under pressure” in the first quarter.
“Foreign currency reserves reached the highest level in over a year in January at US$224 million, a paltry one to two months of import cover,” Standard Bank analysts said.
On the fiscal front, Malawi government faces more pressure on the budget, as slowing growth narrows the revenue base.
A 15.4 percent rise (to $350 million) in recurrent expenditure in 2012 continues to pile pressure on treasury’s thin resources.
Public sector wage demands, which follow a 21 percent increase in June last year, pose further risks.
“Pressure on the budget is likely to mount moving forward, with slowing economic activity set to reduce tax collections while expenditure grows in line with mounting costs of goods,” the analysts say.
Inflation is expected to rise to 40 percent by around April this year from 33.3 percent year-on-year, last November.
The central bank is also expected to act decisively to deal with pressure on the exchange rate and rising inflation by tightening the monetary policy.
Standard Bank analysts say that Malawi Reserve Bank is likely to raise its policy rate by minimum 400 basis points over the next four months in a bid to slow aggregate demand, which will assist in restoring the external balances.
Real rates remain in negative territory despite a 400 basis points rise in the central bank rate to 25 percent last December.
“The continued depreciation of the Malawi kwacha will cause the cost of imported goods to rise further, while local food prices will continue to increase on severe shortages,” the analysts said.
The bank says that authorities in Malawi will not, in the immediate future, be able to stabilise the kwacha, which has fallen to 349 against the US dollar this January from around 169 in May last year.
“The external sector continues to point to further upside risks in USD/Malawi kwacha in the next two to three months, with the USD/MWK likely to reach 400 in this period.
“Foreign currency inflows are to remain extremely limited in the first quarter 2013, with transfers from development partners likely to remain the single source, until proceeds from the tobacco harvests emerge (in March),” the analysts said.
Although mining investment is expected to pick, Malawi’s economy is narrowly diversified. Its over-reliance on the agricultural sector renders it vulnerable to cyclical droughts and floods.
Agriculture accounts for 30 percent of Malawi’s GDP while tobacco exports account for almost half of the country’s total export earnings.
Banda’s predecessor, Wa Mutharika, starred down donors’ ill-informed developmental concepts, engineering an agriculture-led boom in a bid to overcome chronic hunger and food insecurity in the country.
Major donors strongly opposed Wa Mutharika administration’s successful efforts to boost agricultural productivity by subsidising small farmers’ fertiliser use to boost farm yields.
An acrimonious wrangle with donors resulted in some of them cutting budgetary support, which accounted for over 40 percent.
Donors, including the IMF, which clashed with Wa Mutharika over kwacha devaluation, only restored budgetary support under Banda’s administration.

January 2013
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