• Real GDP growth in 2012 slowed down following a contraction in the agricultural and manufacturing sectors, brought on by drought and a foreign exchange shortage. Growth in 2013 and 2014 is projected to rebound to 5.5% and 6.1%, respectively.

  • Malawi’s programme with the IMF under the Enhanced Credit Facility (ECF) went off track in mid-2011 due to policy slippages, which triggered a suspension in donor budget support. The new government, which took over in April 2012 following the death of President Bingu Wa Mutharika, has instituted key policy reforms to address the macroeconomic imbalances and revive the economy. The government’s renewed commitment to sound macroeconomic policies and good governance has led to the approval by the IMF of a new ECF programme and resumption of donor support to Malawi.

  • Malawi’s progress in poverty reduction has been slow. The challenge ahead is to make growth more inclusive and resilient to shocks. The country is broadly on track to achieving four of the eight Millennium Development Goals (MDGs).

Overview

Real gross domestic product (GDP) growth slowed to 4.3% in 2011 from 6.3% in 2010 on account of foreign exchange and fuel shortages, which disrupted activities in sectors such as manufacturing and trade. The shortage of foreign exchange in 2011 was caused by the decline in earnings from Malawi’s major export commodity, tobacco, and suspension of donor budget support. Real GDP growth in 2012 is estimated at 2.0%, substantially lower than the 4.3% growth target. The sharp slowdown in the economy in 2012 was mainly due to the contraction in agricultural and manufacturing output. The agriculture sector, which dominates economic activities, shrank by 3.0% in 2012 on account of erratic rains and the collapse in tobacco auction prices. Real GDP growth in 2013 and 2014 is expected to rebound to 5.5% and 6.1%, respectively, anchored on the recovery in agriculture, manufacturing and wholesale and trade. The rebound is premised on a revival in tobacco production, an easing of the foreign exchange constraint, improved availability of fuel and a continuation of prudent macroeconomic policies.

Malawi faced serious macroeconomic challenges in 2011 and 2012. These were the result of inappropriate policies, which led to a growing fiscal deficit, rising inflation and the depletion of international gross reserves in a context of an overvalued exchange rate. The government, which came to power in April 2012 under the leadership of President Joyce Banda following the death of Bingu Wa Mutharika, has instituted bold macroeconomic policy adjustment measures to address the imbalances. These measures include the devaluation of the Malawian kwacha (MKW) by 49%, with a move towards a flexible exchange rate regime, a tightening of monetary and fiscal policy and a removal of subsidies on fuel. The government has also re-engaged with the IMF, resulting in the resumption of direct budget support by donors. These reforms have started yielding results, as evidenced by the easing of fuel shortages and improved access to foreign exchange by the business community. Economic recovery, however, is fragile and the exchange rate may take time to stabilise given the excess demand for foreign exchange. The government’s second national development plan, the Malawi Growth and Development Strategy II (MGDS II, 2011-2016), was officially launched in September 2012 along with the Economic Recovery Plan (ERP). The latter aims to achieve economic recovery and mitigate the impact of the reforms on vulnerable citizens through immediate and short-term reforms and interventions to restore macroeconomic stability and re-prioritise expenditures toward sectors with the potential to boost economic growth and export earnings. These include agriculture, mining, energy, transport and tourism.    

Malawi has diverse natural resources, ranging from land, water, forestry and minerals – much of which are unexploited. Mineral exploitation started only recently with the opening of the Kayelekera uranium mine in 2009. Thus, despite the diversity of its natural resources, Malawi’s economic structure has not changed much over the last two decades. While the share of mining in the GDP is still relatively small, there is potential for minerals to transform the Malawian economy by generating resources for investment in infrastructure and social service delivery and through spillover effects on local industries, including small- and medium-sized enterprises (SMEs) and beneficiation. Going forward, the challenge is to ensure the country’s natural resources are managed in environmentally sustainable ways and the wider population benefits from them through transparent mechanisms in awarding contracts/concessions and in the distribution of revenues.

Figure 1: Real GDP growth 2013 (South)

Table 1: Macroeconomic indicators

 2011201220132014
Real GDP growth4.325.56.1
Real GDP per capita growth1.1-1.22.32.8
CPI inflation6.419.217.67.5
Budget balance % GDP-2.8-7.2-7.4-7.6
Current account % GDP-17.9-12.7-7-9.5

Recent Developments & Prospects

Table 2: GDP by Sector (percentage of GDP)

 20072011
Agriculture, forestry & fishing--
Agriculture, hunting, forestry, fishing31.631.6
Construction3.43.4
Electricity, gas and water1.81.8
Electricity, water and sanitation--
Extractions--
Finance, insurance and social solidarity--
Finance, real estate and business services11.811.8
General government services2.82.8
Gross domestic product at basic prices / factor cost100100
Manufacturing11.311.3
Mining1.21.2
Other services5.65.6
Public Administration & Personal Services--
Public Administration, Education, Health & Social Work, Community, Social & Personal Services--
Public administration, education, health & social work, community, social & personal services--
Social services--
Transport, storage and communication77
Transportation, communication & information--
Wholesale and retail trade, hotels and restaurants23.523.5
Wholesale, retail trade and real estate ownership--

Malawi recorded strong average growth of 7.1% from 2006 to 2010, supported by sound macroeconomic management and improvement in smallholder agricultural productivity. However, real GDP growth slowed down to 4.3% in 2011 on account of  shortages in foreign exchange, fuel and power. This in turn weakened performance in import-dependent sectors, notably manufacturing, construction, mining, transport, retail and wholesale trade and services. The deceleration in growth occurred against a backdrop of growing external and internal imbalances, resulting from macroeconomic policy slippages and the suspension of donor budget support. Real GDP growth in 2012 fell further to 2.0%. The sharp slowdown in the economy in 2012 was due mainly to the contraction in the agricultural and manufacturing sectors. Growth in other sectors remained buoyant, but it was not sufficient to offset the decline in agriculture and manufacturing. After rebounding in 2011, the agriculture sector, which accounts for 33.0% of GDP, recorded negative growth of 3.0%. Maize and tobacco output was constrained by droughts in the southern part of Malawi and the fall in tobacco auction prices, which were driven down by action taken by the international anti-tobacco lobby.  

While maize production in Malawi has been boosted by the Farm Input Subsidy Programme since 2005, weather remains a key determinant of agricultural production. Delayed rains in 2012 caused a lack of food in some parts of the south, with nearly 1.9 million in need of food relief. This underscores the need for enhanced policy efforts and interventions to diversify the agricultural production base away from maize, while building resilience to weather related shocks through irrigation development.

Output in the manufacturing sector fell by 9% in 2012, mainly on account of persistent shortages of foreign exchange for raw material imports, intermittent fuel supplies (especially in the first half of the year) and an erratic power supply. The deterioration in the business climate contributed to the contraction in manufacturing activities. In contrast, the mining, construction and services sectors performed strongly. Mining and services grew at 22% and 46%, respectively. Growth in services has been driven by financial services and telecommunications, which have witnessed rapid expansion in recent years.                  

Looking ahead, real GDP growth in 2013 and 2014 is expected to rebound to 5.5% and 6.1%, respectively, anchored on the recovery in agriculture, manufacturing and wholesale and trade. The rebound will come from the anticipated recovery in tobacco production, the easing of the foreign exchange constraint, improved availability of fuel and macroeconomic stability. The agriculture sector is projected to grow by 5.1% in response to improved price incentives for tobacco production from exchange rate adjustment and recent policy initiatives to promote contract farming for commercial crops and expand production of cotton, rice, pulses and legumes. Manufacturing is projected to grow by 11.2%, driven by growth in agro-processing, consumer goods and cement. Reduced consumer demand due to rising prices and continued power outages, however, is likely to pose a risk to manufacturing sector growth in 2013. The mining sector in 2013 is expected to grow at 14.1%, boosted by expansion in coal, quarry and cement production and the commissioning of the Kanyika niobium mine. Over the medium to long term, mining is poised to increase its contribution to the Malawian economy, as new mines are established and the Kayelekera uranium mine enters its second production phase.

The agriculture sector will continue to be the primary driver of Malawi’s growth over the longer term, but it is expected to be more diversified. Currently, the sector contributes 33% of GDP, but this share is likely to decline steadily as mining, construction and services continue to expand. The services sector at the moment accounts for 42% of GDP, up from 37% in 2005.         

In 2012, the government launched the successor to the MDGS I, the MDGS II (2011-2016). The objective of the MDGS II is to promote wealth creation and poverty reduction through sustained and inclusive growth. It identifies six thematic areas: sustainable economic growth, social development, social support, infrastructure development, governance, gender and capacity building. At the same time, the government launched an 18-month ERP focusing on priority sectors and activities, such as commercial agriculture, tourism, mining, infrastructure and Information Communication Technology. The 2012/13 budget is aligned with the MDGS II and the ERP, with the focus on achieving fiscal sustainability by boosting revenues and limiting expenditures in order to increase spending on key priority areas. The donors increased their support to Malawi during the 2012/13 fiscal year to bolster economic recovery and protect vulnerable citizens from the impact of macroeconomic policy reforms.

Macroeconomic Policy

Fiscal Policy

Malawi has faced serious macroeconomic challenges since the end of 2010, including rising fiscal deficits and domestic debt and a shortage of foreign exchange. This has resulted in the scarcity of fuel and other critical inputs for the economy. In 2011, the government tightened foreign exchange controls in an attempt to stem the depletion of foreign exchange reserves. This action proved counter-productive, as most of the trade transactions were diverted to the parallel market, raising import costs. The slippage in macroeconomic reforms derailed the IMF programme mid-2011. This, coupled with governance and human rights concerns, led donors to suspend budget support for 2010/11. The drop in tobacco export earnings due to lower tobacco auction prices and output exacerbated the foreign exchange shortage. By March 2012 the level of foreign exchange reserves had plummeted to less than one month of import cover. The new government instituted a number of bold policy reforms to improve economic and democratic governance. Notably, various restrictions on foreign exchange transactions were removed, while the exchange rate was devalued by 49% to MKW 250 per USD from MKW 167. The government tightened monetary and fiscal policy and adopted market-based pricing of fuel and other utilities.   

The adjustment measures started yielding some results from the second half of 2012, as evidenced by the resumption in donor budget support, increased availability of foreign exchange, easing of fuel shortages and the gradual restoration of supply credit lines. As a result of exchange rate unification, the parallel market premium has been reduced from 80% to about 10%. The Reserve Bank of Malawi also injected about USD 275 million into the market. This has helped clear outstanding external payment arrears that accumulated during the economic crisis.

The first quarterly review of the new ECF programme, which was completed by the IMF Board in December 2012, assessed Malawi’s performance as satisfactory. This performance was against the backdrop of rising inflation and drought. Since the devaluation of the exchange rate, the kwacha has depreciated sharply, especially during the last quarter of 2012 (also the lean season for foreign exchange earnings). In view of the excess demand for foreign exchange in the economy, the kwacha is expected to continue to depreciate into 2013, but at a slower pace. While the kwacha’s depreciation has significantly improved Malawi’s external competitiveness, exchange rate instability could on the other hand harm investment, as planning in such an environment is difficult. The authorities will therefore need to continue with the tight monetary and fiscal policy stance to ease pressure on international reserves and the exchange rate and ensure there is an adequate buffer against shocks.

The authorities loosened Malawi’s fiscal policy in 2011 despite their commitment to a zero deficit financing target. The government’s fiscal position deteriorated from a surplus of 0.1% of GDP to a deficit of 2.8% of GDP. Fiscal performance in 2012 weakened further mainly on account of lower than expected domestic revenue collection and external grants. Tax revenue declined from 19.9% to 16.2%, while external grants fell from 7.3% of GDP to 3.7%. This led to a widening of the overall fiscal deficit from 2.8% to 7.2%, compared to the zero fiscal deficit target for 2012. Consequently, net domestic financing jumped to 6.6% in 2011/12 from 1.7% of GDP the previous fiscal year, resulting in an increase in the net domestic debt stock from 16.3% of GDP to 20.0% and a build-up in expenditure arrears to MKW 72 billion.

Total expenditure and net lending in 2012 amounted to MKW 341.1 billion. The target was MKW 328.1 billion, reflecting an expenditure overrun of MKW 13 billion. Recurrent expenditure accounted for MKW 260.6 billion, with a target of MKW 250.7 billion, while development expenditures came to MKW 80.5 billion against a target of MKW 77.4 billion. With 2012 expenditure and net lending at MKW 341.1 billion and domestic revenues and grants at MKW 257.1 billion, the overall fiscal balance amounted to a deficit of MKW 84.1 billion against a target deficit of MKW 67.9 billion. The deficit was fully financed by MKW 19.5 billion in foreign borrowing and MKW 64.5 billion in domestic borrowing.

As part of the adjustment effort, the government is implementing prudent fiscal policies involving measures aimed at boosting domestic revenues, restraining expenditure growth and reducing the domestic debt. The fiscal anchor is a zero net-domestic financing target. The fiscal policy adjustment measures undertaken by the government include: the adoption of an automatic fuel price adjustment mechanism to ease the pressure of subsidies on the budget, a tightening of expenditure controls, a reduction in non-essential recurrent costs such as travel and vehicles and an alignment of expenditures with top priorities in the MGDS II, including social welfare programmes.

The government's 2012/13 budget framework was formulated against a background of a challenging macroeconomic environment. The framework is anchored to a zero net-domestic borrowing target and aims to achieve fiscal sustainability and stability while supporting the MGDS II growth objectives. To achieve these objectives, expenditure growth for 2013 is projected at 33.0% of GDP. The deficit is projected to fall from 8.5% of GDP in the 2011/12 financial year to 1.1% in 2012/13, supported by a doubling of donor grant inflows from 4.4% to 10.4%. Mounting fiscal pressures for the rest of the financial year are expected to come from the cost of wages, the rising price of fertiliser subsidisation, interest payments on debt and spending on generic goods and services (especially on account of the rise of the kwacha value of drugs and teaching and learning materials due to exchange rate depreciation). The availability of donor financing will therefore be critical to ensure that the 2012/13 fiscal targets are met.

Table 3: Public Finances (percentage of GDP)

 200920102011201220132014
Total revenue and grants32.733.830.922.234.934
Tax revenue18.718.619.916.218.717.1
Oil revenue------
Grants11.710.37.33.712.613.3
Total expenditure and net lending (a)3833.833.629.342.341.6
Current expenditure30.825.726.122.630.829.7
Excluding interest28.122.923.520.628.127.3
Wages and salaries5.85.96.66.16.86.5
Interest2.72.82.62.12.72.3
Primary balance-2.52.9-0.2-5.1-4.7-5.3
Overall balance-5.30.1-2.8-7.2-7.4-7.6

Monetary Policy

The government’s monetary policy is geared to controlling inflation and maintaining price stability, while ensuring sufficient credit to the private sector and an accumulation of reserves to provide an adequate buffer against external shocks. To ease inflationary pressures, the government tightened monetary policy in May 2012, raising the policy rate from 13% to 16% and then to 25% in November 2012. This has translated into high lending rates, with average bank lending rates increasing to 36% in December 2012 from 17.8% in December 2011. Furthermore, in a bid to mop up excess liquidity, the government has expanded open market operations through the sale of foreign exchange and Treasury bills. It has also undertaken to amend the Reserve Bank of Malawi (RBM) Act to put a statutory limit on the government's borrowing and enhance the independence of the central bank in monetary policy management.

Inflation is expected to decline in 2013 with the implementation of restrained fiscal and monetary policies. This in turn is anticipated to counteract the effects of the second round of petroleum price adjustments. Headline inflation at end-2013 is projected at 10.1%, with average annual inflation in 2013 projected at 17.6%. Single digit inflation is expected to be achieved in 2014. Exchange rate stability and progress in boosting the economy’s competitiveness will be a key factor in moderating inflationary pressures in the years ahead.

Exogenous factors such as terms of trade and donor inflows have a major influence on Malawi’s balance of payments. Malawi’s external sector has over the past two years been affected by shocks to tobacco earnings and donor inflows. As a result, the level of Malawi’s gross international reserves has remained low, at the equivalent of one month of import coverage. The overall balance of payment deficit in 2011 stood at 1.8%, but narrowed to 0.5% of GDP in 2012, mainly on account of higher external grants. The current account deficit, including external grants, improved from 5.9% to 4.3%. The surge in external grants outweighed the deterioration in the trade balance arising from the reduction in export earnings.

The outlook for 2013 will largely depend on the prospects for tobacco, which is Malawi’s main export commodity, and donor inflows. Foreign exchange earnings from tobacco in 2013 are projected to rebound to USD 577 million from USD 481 million in 2012. Total exports are projected to increase to 35.8% of GDP in 2013 from 31.5% in 2012. Imports, on the other hand, are expected to slow down as the kwacha continues to depreciate and the import capacity remains constrained. Driven by improvement in the trade balance, the current account is projected to decline from 12.7% of GDP in 2012 to 7.0% in 2013. The gross international reserve position is expected to rebound to two months of import cover. While headwinds from the global environment are likely to pose risks to the external sector, the medium-term outlook is favourable provided the government remains on course with macro adjustment and structural reforms.

Economic Cooperation, Regional Integration & Trade

Malawi is a member of the Southern African Development Community (SADC) and Common Markets for Eastern and Southern Africa (COMESA). It is a signatory to the COMESA Customs Union and the SADC Free Trade Area and is in the process of aligning its tariffs with the COMESA/SADC thresholds. As a landlocked country, Malawi faces high transport costs and delays in the clearance of goods at the border, resulting in low competitiveness. It can counter this by developing regional transport corridors and harmonising its trade regimes. A number of reforms and programmes to boost regional trade are already underway, including the establishment of one-stop border posts, the simplification of the trade regime for small traders and the development of transport corridors. In addition to these regional arrangements, Malawi is negotiating an Economic Partnership Agreement (EPA) under the ACP-EU (Africa Caribbean Pacific-European Union) to enjoy preferential market access through the Everything But Arms (EBA) initiative.   

Table 4: Current Account (percentage of GDP)

 2004200920102011201220132014
Trade balance-11.9-7.8-14.3-12.2-7.7-3-5.9
Exports of goods (f.o.b.)1924.123.824.531.535.833.1
Imports of goods (f.o.b.)30.931.938.236.839.238.839
Services0.4-5.5-6.2-6.4-5.7-4.6-4.2
Factor income-1.7-0.8-1.1-1.2-1-0.9-0.8
Current transfers2.621.921.81.51.4
Current account balance-10.6-12.1-19.7-17.9-12.7-7-9.5

Debt Policy

Malawi’s external debt stock has grown steadily since qualifying for debt relief under the HIPC/MDRI in 2006. The debt stock amounted to USD 1.4 billion (23% of GDP) in June 2012, up from USD 488 million in 2006. The Debt Sustainability Analysis conducted in 2012 concluded that despite the growth in external debt the debt burden ratios remain below the country thresholds. However, stress tests revealed that with an export shock the thresholds could be breached, underscoring the importance of export diversification. The country’s domestic debt stock has expanded more rapidly due to an expansionist fiscal policy and accommodative monetary policy. The domestic debt was estimated at MKW 165 billion (16.5% of GDP) at the end of June 2012, well within the 15-20% upper limit considered to be safe. The net domestic debt burden is expected to moderate from 20% of GDP in 2011/12 to 14% of GDP in 2013/14. Fiscal consolidation will be essential to ensure that the domestic debt remains at manageable levels and does not crowd out the private sector. 

Figure 2: Stock of total external debt and debt service 2013

Economic & Political Governance

Private Sector

The private sector is recognised as the engine of growth in Malawi’s long-term vision and its medium-term development strategy. However, the business environment in Malawi has deteriorated in recent years despite the policy focus on private sector development. The difficult business environment, which has been aggravated by macroeconomic challenges, has significantly eroded the competitiveness of the Malawian economy. This has contributed to the low volume of foreign direct investment (FDI). For instance, there has been no improvement in the number of procedures it takes to register a business, acquire a construction permit or register property in Malawi over the last five years. The only improvement has been in contract enforcement. The World Bank report Doing Business 2013 ranked Malawi at 157 out of 185 countries, six rankings lower than in 2012. This deterioration reflects limited private sector reforms undertaken in the last four to five years. The government has been implementing the Business Environment Support & Technical Assistance Programme (BESTAP) for several years with a view to improving the regulatory environment, but most of the laws that were reviewed have not yet been enacted. The key constraints to private sector development and competitiveness in Malawi include weak infrastructure, high transport costs, limited access to finance, a weak skills base, red tape and a high tax burden.

Within the framework of the MGDS II and ERP, the government has reinvigorated policy efforts to improve the business climate, boost competitiveness and diversify exports. The agenda includes policy measures and interventions targeted at improving the reliability of infrastructure services, regulatory reform and the rationalisation of business taxes. In the 2012/13 budget, taxes that were constraining private sector operations were abolished. These include the minimum tax based on turnover, taxes on capital gains from the sale of shares and value added tax on financial services, machinery newspapers and internet services. The government has introduced an Industrial Rebate Scheme to encourage local production and has removed duties, excises and VAT on imported raw materials. In 2012, the government launched the National Export Strategy (NES) for 2013-18. The NES is a prioritised road map for developing Malawi’s productive base to allow for both export competitiveness and economic empowerment. While the government’s renewed effort to improve the business climate holds much promise, policy predictability will be vital to ensuring a strong private sector response. 

Financial Sector

The financial sector in Malawi has limited outreach and is relatively small and concentrated. Two banks accounted for almost two-thirds of total bank assets in 2012. Although the financial sector has witnessed rapid growth in recent years, access to financial services remains limited. Only 19% of the population has access to banking services, while a mere 3% use insurance products. In the Doing Business 2013 report, Malawi’s ranking on getting credit in fact declined from 116 to 126 in 2012.   

Access to finance for small- and medium-sized enterprises (SMEs) is a major challenge, especially when it comes to accessing long-term finance. Banks are unwilling to lend to SMEs (which make up the largest number of private sector actors) due to the increased risk associated with this market segment, lack of conventional forms of collateral and lack of information on credit history to monitor borrowers. Medium- and long-term project financing is not readily available in Malawi. Non-banking financial institutions are emerging, including micro and savings institutions, and their importance in the financial system is likely to grow.

The financial sector is characterised by high lending rates (the maximum lending rate was 41% at end-2012), which suggest that competition in the financial sector is weak. The government is pursuing reforms to promote financial inclusion and has enacted new laws such as the Credit Reference Bureau, Pension Fund and Financial Cooperative Act. The Ministry of Trade and Industry has prepared a bill on secured transactions, which would allow lenders and borrowers to recognise movable property as collateral. Incentives are being provided to encourage mobile banking to expand access to financial services and lower costs of transactions for banks. In 2012, the government approved a strategy to guide financial sector development.

Malawi’s financial sector is judged to be sound, with capital adequacy ratios and the share of non-performing loans all within prudential limits. Portfolio risks, however, have heightened over the last year due to macroeconomic pressures. The RBM has had to tighten financial sector surveillance and monitoring to safeguard financial stability. 

Public Sector Management, Institutions & Reform

Natural Resource Management & Environment

Malawi is endowed with a diversified natural resource base, which can provide the basis for sustainable socio-economic development of the country. However, because about 85% of Malawians depend on these resources for their livelihood, the natural resource base is subject to increasing pressure, especially with the high population growth rate of 3.2%. Malawi’s ecology is fragile and climate change is already having negative effects. The key challenges faced are continued degradation of resources by loss of forest cover and a high proportion of the population using solid fuels as a form of energy (almost 100% of the rural population and 85% of the urban population). As a result, about 27% of Malawi’s 9.4 million hectares of land area under forest cover is disappearing at the rate of 2.6% per annum. The main environmental issue is land degradation, resulting from significant loss of soil fertility, soil erosion, deforestation, water depletion, pollution and loss of biodiversity. Malawi is among countries that have a very low capacity to adapt to predicted changes in the climate. These challenges are exacerbated by population growth, inadequate alternative livelihoods (the economy is still largely agriculture based), lack of alternative affordable and reliable energy sources, inadequate budgetary allocations, lack of institutional co-ordination and lack of community participation in environmental and natural resources management.

The government recognises that the country’s vulnerability to climate change would limit its potential to achieve sustainable development and is pursuing initiatives to address the challenge. As a signatory of the Multilateral Environment Agreements (MEAs), Malawi has developed a framework to ensure sound environmental management, underpinned by the Environmental Management Act (1996) and National Environment Policy (NEAP, 2004). In addition, the country’s National Adaptation Program of Action (NAPA) was officially launched in 2008. Climate change is also one of the nine key priority areas of the MGDS II. The government established a new Ministry of Environment and Climate Change in 2012 to promote and develop policy and the legal framework for managing the environment and climate change. It has also attempted to promote environmental management by communities and has introduced cash transfers to farmers for activities related to tree planting and conservation. In 2011/12, the government instituted a levy to reverse deforestation caused by tobacco farming. Going forward, the country intends to continue to prioritise natural resources, environmental management and climate change in its national development plan, the MDGS II (2011-16).

Political Context

Malawi underwent a smooth transition to a new administration following the death of President Bingu wa Mutharika in March 2012. During the second term of President Bingu’s presidency, Malawi’s political and economic governance deteriorated and relations with donors broke down, resulting in economic meltdown. The country experienced violent demonstrations in July 2011, which were triggered by the enactment of draconian laws seen as impinging on human rights and press freedom. The new administration, led by Vice President Banda, moved swiftly to repeal repressive laws and improve economic management to alleviate the economic crisis that had engulfed the country. Other measures to improve governance, such as the access to information and assets declaration laws, are under preparation.  

The new government includes members who previously served in President wa Mutharika’s government, plus politicians that have resigned from other parties. By including other parties, President Banda has been able to garner sufficient support to enable her to implement some difficult policies to reverse the downward trend in the economy. The next elections are due in May 2014 and preparations are under way with support of the international community. The electoral laws were amended in 2012 to provide for local, parliamentary and presidential elections at the same time.

Meanwhile, the government, led by President Banda’s People’s Party, is coming under increasing political and social pressure in view of the rising cost of living, which has fuelled demands for wage adjustments and led to a wave of strikes. The challenge for the government is to remain steadfast with the reforms in the face of these pressures. While political tensions are likely to heighten as political parties prepare for elections, prospects for peaceful and democratic elections seem bright. Malawi has demonstrated political maturity over the past four consecutive elections, building confidence that the upcoming ones will be peaceful. 

 

Social Context & Human Development

Building Human Resources

Malawi has recorded encouraging progress in improving health outcomes. According to the recently released Malawi Demographic and Health Survey (MDHS 2010), mortality rates for children under five declined from 133 deaths per thousand live births in 2004 to 112 deaths, while infant and child mortality rates declined from 76 and 62 deaths per thousand live births to 66 and 50 deaths per thousand live births, respectively. These gains have resulted from expanded access to antenatal care, a fall in cases of chronic malnutrition and an expansion in vaccination rates. Malawi has also managed to reduce incidents of major diseases, including malaria. While progress on HIV/AIDS has been made, the prevalence rate in Malawi (10.6%) is still amongst the highest in the world.

Life expectancy increased to 53 in 2012 from 38 in 1995, reflecting improvement in health outcomes through such initiatives as the National Reproductive Health Strategy, Integrated Management of Child Illnesses (IMCI), the Essential Health Package and distribution of mosquito nets under the Health SWAp. In September 2011, the government adopted the Health Sector Strategic Plan 2012-2016 (HSSP), which has been endorsed by development partners. The health budget allocation in the 2012/13 financial year increased by 14% in support of the HSSP.

However, differences still persist with regard to urban and rural outcomes across these indicators. Rapid population growth rates have compounded the challenge of further expanding health services delivery. The challenge notwithstanding, Malawi is on track to meet the MDGs relating to child and infant mortality targets and combatting diseases. Malawi, however, is unlikely to meet the MDG for maternal mortality because of challenges in improving access to maternal care services, high fertility levels and HIV.     

Malawi’s educational outcomes are low even by regional standards; indeed, they are below the average for Africa. Nevertheless, notable progress in school enrolment has been registered over the past decade. The net primary enrolment rates increased from 58% in 2000 to 83% in 2012, while completion rates at grade 5 increased from 65% in 2000 to 73% in 2010. The ratio of girls to boys (gender parity) in secondary school is only 0.79. The low quality of education is also a challenge. Although the country’s free primary education policy has helped increase enrolment from 1.9 million to about 3 million, inadequate investments in personnel and infrastructure have affected the quality of primary education. Similarly, enrolment rates at the tertiary level are low, with vocational education at 35 students per one hundred thousand inhabitants. In fact, Malawi has the lowest number of technical and vocational students relative to comparator countries. Its literacy rate is estimated at 62% (69% for men and 59% for women). It is estimated adult literacy programs reach 50% of the 2.6 million illiterate people.

Overall, the education sector faces significant challenges. These include a high pupil-teacher ratio (PTR) of 76:1 (up to 100 children per class) and high repetition and drop-out rates – at 20% in primary education, repetition rates are one of the highest in Africa. Other pressing challenges exist with service delivery, unequal access, outdated legislation and capacity constraints, which collectively have translated into poor and irrelevant education.

The country has put in place a National Education Sector Plan (NESP 2008), which serves as the overarching policy framework. However, given the stated challenges, Malawi is unlikely to meet the MDG 2 of achieving universal primary education.

Poverty Reduction, Social Protection & Labour

The Malawi Growth and Development Strategy (MGDS) provides the overarching medium-term framework for poverty reduction. According to the 2012 Integrated Household Survey (IHS) report, Malawi’s poverty level was reduced marginally from 52.4% in 2005 to an estimated 50.7%. The Farm Input Subsidy Program (FISP), the Public Works Program (PWP) and the Malawi Rural Development Fund (MARDEF) are the key means through which the government assists vulnerable groups. However, it is aware that such programmes may not reach the “ultra-poor”, who are marginalised and have no access to land and income. Hence, cash transfers have been adopted as a complementary way to help those in extreme poverty. Malawi’s main safety net programmes consist of the FISP, the Malawi Social Action Fund and the social cash-transfer plan.

The social welfare policy, which focuses on the poorest and most vulnerable groups, was approved and adopted by the cabinet in July 2012. It is supported by the National Social Support Programme (NSSP), which outlines a five-year plan of action for social support programmes and provides strategy on co-ordination and linkages. The NSSP prioritises five sub-programmes that are currently being implemented: Social Cash Transfers, Micro Finance, Village Savings and Loans, Public Works Programme and Targeted School Meals Programme. However, effective implementation of these programmes is undermined by insufficient financial resources for scaling up coverage and ensuring sustainability. In specific cases, identification, targeting and graduation of beneficiaries pose major challenges.

The recent devaluation of the currency has exerted additional pressure on the poor, pushing them further into extreme poverty. The government increased the threshold for pay-as-you-earn from MKW 12 000 to MKW 15 000 in the 2012/13 financial year budget. It also shifted the 15% tax bracket from MKW 3 000 to MKW 5 000, while the excess will be taxed at 30%. In addition, it has removed the standard 16.5% VAT on machinery, financial services, newspapers, internet services, bread and goods imported by the parastatal water supply bodies, the Water Boards.

Gender Equality

Despite gender equality being guaranteed by the constitution and legislation, women are still marginalised in Malawi. The country has a gender inequality indicator of 0.594 (with 0 being full equality and 1 being full inequality) and a Human Development Index rank of 120 out of 187 (UN Human Development Report 2011). Only 10% of women, compared to 18% of men, are in wage employment. The median daily wage for women is MKW 78, as opposed to MKW 124 for men. In addition, only 10% of women own a company, whereas the rate is 16% for men. While the National Land Policy recognises the rights of women to own land, women are in practice discriminated against. There is also a significant gender gap in access to credit, with only 11% of women having access to credit, compared to 14% of men. With these disparities, Malawi is unlikely to meet the MDG 3 of gender equality and empowering women. Of the five targets to meet this goal, the country is unlikely to meet three: the ratio of girls to boys in secondary school, increasing the share of women in wage employment in the non-agriculture sector and increasing the proportion of seats held by women in parliament (it is a mere 22%).

Going forward, the enactment of proposed amendments to the Affiliation Act, Marriage Act and Wills and Inheritance Act will promote equal access to economic resources.

While gender issues are mainstreamed in policies, the challenge is to ensure adequate enforcement and monitoring, and overcome deep-seated cultural biases. There now seems to be a strong political will to address gender inequity, but this has to be supported by adequate budgetary allocations to the agencies directly responsible for gender issues, plus capacity building in gender mainstreaming.

 

Thematic analysis: Structural transformation and natural resources

Malawi is endowed with diverse natural resources, ranging from land, water, forests, livestock and minerals. Land is the most valuable resource for Malawi in view of its agro-based economy. Most of the land is used for food production, mainly maize and tobacco, which is Malawi’s main export commodity. Out of a total land area of 9.43 million hectares, 36% is under forest cover, including forest reserves and plantations. Malawi has used its forestry resources to support agricultural and other economic activities, such as wood processing industries for local and regional markets and construction. Lake Malawi is another natural resource that can be harnessed. The lake supports fishing and tourism and has potential to provide water for irrigation. Among Malawi’s mineral resources are uranium, rare earth minerals and coal. The first large-scale commercial mining operation, the Kayelekera uranium mine, commenced operations in 2009. Since then interest in Malawi’s mining sector by foreign mining companies has grown, leading to expansion in mineral exploration. The government plans to establish more mines over the next decade. A niobium mine at Kanyika is expected to be operational by 2014. It has also awarded rights for oil prospecting in Lake Malawi. However, prospecting for oil has been put on hold pending resolution of the territorial dispute with Tanzania.  

As an agro-based economy, Malawi has managed to earn high returns from its cash crops (primarily tobacco), particularly during periods of high commodity prices. However, over-reliance on agriculture, weak conservation practices and dependence on fossil fuels for energy in rural areas has resulted in natural resource degradation. The country’s forest cover, for instance, has been diminishing at an alarming rate of 2.8% per annum, posing major challenges for environmental sustainability. Deforestation has resulted from many factors, including growing human settlements, expansion of land for farming and weakness in policing illegal exploitation of forests. For many years Malawi has also lacked an integrated approach to the management of its water resources to ensure optimal utilisation. For example, only 5.0% of the irrigable land is under irrigation despite the vast potential from Lake Malawi. According to a 2010 report by the UNDP-UNEP Poverty Environment Initiative (PEI), an estimated 5.3% of GDP (or USD 191 million) is lost annually through unsustainable natural resources management. The challenge facing Malawi is balancing growth and economic transformation with the sustainable management of its natural resources. Natural resources such as minerals, for example, offer significant growth opportunities.   

The structural transformation of the Malawian economy over the past two decades has been limited in spite of the country’s diverse natural resource base. Agriculture remains the mainstay of the economy, while the country’s exports consist largely of primary commodities. Moreover, there has been little value addition to primary commodities, rendering the economy vulnerable to trade shocks. Manufacturing, which used to contribute 15% of GDP two decades ago, has seen its share decline to 10%. The slow pace of structural transformation is partly reflective of weak policies, distorted incentives and an absence of strong institutions to promote investment in new economic activities to respond to emerging global and regional market opportunities. 

The government has established policy and institutional frameworks for natural resource management and conservation. Nevertheless, there are some critical bottlenecks, the primary one being the lack of institutional capacity and resources for natural resource management. Within the decentralised framework, local government bodies are unable to properly manage natural resources, including preventing the illegal export of resources such as forestry products to neighbouring countries. The government is aware of these challenges and has developed policies and strategies to improve natural resource management to ensure sustainability (part of the MGDS II). These include enforcing laws to prevent the exploitation of natural resources and improving the co-ordination of environmental and natural resource programmes and projects that promote the conservation of biodiversity. In the past, the management of natural resources was highly centralised. To ensure a bottom-up approach, the government has decentralised natural resources management to local communities and villages.

The thrust of the government’s MDGS II and the ERP is to foster economic diversification toward other natural resource-based economic activities and sectors to drive growth. Mining, forestry, and tourism offer the most significant opportunities. The focus on this diversification is particularly critical for the country to ensure more balanced and sustainable growth. While promoting other sectors, agriculture will continue to play a central role in driving Malawi’s growth over the medium to long term.

Given the onset of uranium mining in 2009, the mining and quarrying sector is also likely to play an important role in Malawi’s economic growth and exports. The mining sector has grown by an average of 30% over the last five years and further investments are expected in the future. While the returns in mining are potentially high, the sector poses major challenges, partly related to the isolated nature of mining activity. Foreign exchange earnings from uranium are projected to reach USD 200 million by 2014. Without sound governance and regulatory frameworks, the rent from mineral exploitation could turn out to be more a curse than a driver of growth. To address these challenges, the government has adopted a new National Minerals Policy and is developing a regulatory and legal framework to avert negative social and community impacts and ensure a fair redistribution of mineral revenues to the central government and to local communities. The government is also implementing a minerals governance programme with the assistance of its development partners, and it has shown interest in signing up to the Extractive Industry Transparency Initiative (EITI).  

Illovo Sugar is an example of successful efforts to harness natural resources to foster economic transformation and contribute to exports and growth. This plan entails smallholder outgrowers employing a private company to provide professional management services in cane production and guarantee a market outlet for the crop. Illovo Sugar contributes to the government’s policy of economic diversification away from tobacco as a means to enhance economic resilience. It employs 5 500 permanent workers and 4 600 seasonal workers. The other opportunities for expanding agro-processing outside sugar include tea, cotton and edible oils, where Malawi enjoys a comparative advantage. 

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