Improvement predicted for Malawi’s economy

Improvement predicted for Malawi’s economy

Nicknamed the “Warm Heart of Africa”, Malawi is a landlocked country in southeast Africa and home to an estimated 14,9 million people. Economic reforms implemented last year, are set to facilitate significant improvement in the region’s economy, with many of the worst effects of these reforms beginning to ease.

GDP composition

Malawi’s economy is still heavily reliant on the agricultural sector, which accounts for approximately 32.8% of GDP. The sector also contributes to the country’s foreign exchange earnings, making Malawi vulnerable to both weather conditions and external price shocks. The industrial sector is relatively small compared to services and agriculture, but uranium mining has in recent times become a lucrative enterprise in this sector.

Malawi Snapshot

Malawi Snapshot

As part of our Malawi Country Snapshot for Q2 2013, we have identified a series of opportunities, strengths and vulnerabilities:

Opportunities

  • Malawi’s economy is expected to show significant improvement in 2013
  • Significant potential in the uranium industry
  • The market holds potential for further development in the communications industry

Strengths

  • Greatly improved donor relationships and firm government commitment to improving the economy.
  • Increasing uranium output is diversifying exports away from heavy reliance on tobacco.
  • Strong historical average real GDP growth from 2007-11.

Vulnerabilities

  • The level of foreign exchange reserves is still low due to Malawi’s large current account deficit.
  • Exchange rate devaluation has rendered imports much more expensive than before; therefore, inputs into the production process are much more expensive in local terms.
  • Still heavily reliant on burley tobacco industry, which is not only weather dependent, but the World Health Organisation may also impose regulations, which could impact global demand negatively. Tobacco harvests in 2012 were exceptionally poor.
  • The exchange rate devaluation, although necessary, has led to a sharp increase in consumer prices.

Addressing economic vulnerabilities in Malawi

In terms of addressing these vulnerabilities, Malawi’s improved relationship with the International Monetary Fund (IMF), and the devalued kwacha will allow a freer flow of foreign currency into the country.  While the devaluation is painful at the moment, it will benefit the country in the long-run, as the exchange rate is now closer to its market-determined value.

The growth in the uranium industry is reducing the country’s reliance on tobacco. At the same time, in comparison to last year’s poor tobacco harvest, this year is showing evidence of a much more sizable crop. This is promising with tobacco prices sitting relatively high.

The Reserve Bank of Malawi (RBM) has raised the benchmark interest rate three times since the devaluation occurred in order to slow the rise of prices. Base effects are expected to lead to lower CPI inflation rates towards the latter part of this year.

The government of Malawi has an official development plan, the Malawi Growth and Development Strategy (MGDS), which aims to reduce poverty through economic growth and infrastructural development.

For the big picture, download the Malawian Q2 Snapshot: Download

David Okwara

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