Authors : Alka Bhatia, Peter Mwanakatwe
In 2016, Malawi’s economy continued to face challenges emanating from adverse weather conditions. The drought reduced output of maize, the main staple crop, by 14%, necessitating maize imports to meet the supply gap, at significant cost.
The drought also had a negative impact on power supply, constraining economic activities in sectors such as manufacturing, which experienced low capacity utilisation. The economic challenges were exacerbated by poor tobacco earnings, a rapidly depreciating kwacha, high inflation and high interest rates dampening consumer and business confidence.
Average annual headline inflation in 2016 stood at 22.6%, slightly lower than the 2015 figure of 21.0%, with rising food inflation as the main driver. The monetary policy stance in 2016 remained tight with a view to containing inflation. Inflation is projected to fall to 16% by the end of 2017 and decelerate further to 9.7% in 2018 assuming normalisation of food supply, improved fiscal discipline and stabilisation of the kwacha. Nonetheless, upside risks to inflation remain elevated in view of the expected increase in international oil prices and persistent domestic borrowing pressures. The Reserve Bank of Malawi (RMB) is, therefore, likely to maintain a cautious approach and allow the policy rate to decline only when inflationary expectations are reduced.
Fiscal policy management in FY 2015/16 was challenged by revenue shortfalls, non-availability of donor budget support, spending pressures from domestic debt servicing costs and the high costs of fertiliser subsidies. Despite fiscal policy tightening, net domestic borrowing increased beyond the budget by 1% of GDP due to the need to respond to the food crisis through additional financing. Fiscal consolidation efforts were deepened in the context of FY 2016/17 budget through reforms to the Farm Input Subsidy Programme (FISP) and restrained public sector wage growth.
Real GDP growth is projected to rebound to 4.0% in 2017 and accelerate to 5% in 2018, driven by agriculture and services. The risks to the economic outlook, though, remain significant. These include inflation, weak tobacco prices and uncertainty over external donor inflows.
Entrepreneurship development needs more support in Malawi, given existing talent and potential. The growth of micro-, small- and medium-size entreprises (MSMEs) could be enhanced through better business support services, improving access to finance and creating stronger linkages to markets. A coherent and co-ordinated approach to entrepreneurial development to spur industrialisation is needed.
Unlock the potential of African entrepreneurs for accelerating Africa’s industrial transformation, says the African Economic Outlook 2017
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