GDP growth to slow further—analysts

Gross domestic product (GDP) growth in 2012 will dip further from the initial forecast of 4.3 percent owing to a number of constraints taking root in the Malawi economy, analysts have predicted.

Finance Minister Dr. Ken Lipenga, in the 2012/13 budget, put growth at 4.3 percent, a downward revision from the initial projection of 6.9 percent, largely affected by macroeconomic and structural challenges.

Malawi’s economy is currently riddled with a number of problems. The 49 percent devaluation of the kwacha and its subsequent flotation on May 7 this year, have triggered a rise in the inflation rate.

Already, the devaluation has adversely affected the performance of some of the Malawi Stock Exchange (MSE)-listed companies most of which have posted lower than expected profits in the first half of the year due to shocks into the financial system.

Forex shortage

The companies—Nico Holdings Limited, Press Corporation Limited (PCL), Mpico Limited and TNM plc—have incurred huge foreign exchange losses on account of resultant increases in finance charges.

Also, most of the firms that had loans denominated in foreign currency or had foreign debt servicing obligations have coughed more money in kwacha terms to service the loans, affecting their balance sheets in the first half and eating into their working capital.

The acute shortage of forex and fuel, which were more serious in the first quarter of 2012, have hit leading manufacturers such as Carlsberg Malawi Limited, Unilever, Illovo Sugar and other firms that form the backbone of Malawi’s real sector.

Slackening agricultural output, which accounts for roughly 40 percent of the economy, could also hit GDP prospects.

Worsening utility service provision, especially in terms of power and water supply critical to industrial output, are adding pain to an already bedridden economy.

Add to that the strikes paralysing both the public and private sectors which government is failing to resolve, and you have an economy on the precipice.

Soaring inflation

Donor aid, which is supposed to support more than 30 percent of the national budget, has not come as fast as pledged, creating uncertainties in balance of payment (BoP) and leaving the central government—already in an austerity drive—with little to spend in the economy and help stimulate it.

The skyrocketing cost of living is another slow poison.

Prices of goods and services have shot through the roof resulting in a further rise in the cost of living that has thrown more Malawians into poverty.

The resultant shrinking purchasing power and low consumer confidence is also taking a toll on the economy as inflation bites hard.

Inflation is currently at 21.7 percent, well ahead of the annual forecast of 18.4 percent. Analysts have predicted that the rate is expected to rise further owing to the pass-through effects of the currency adjustment in April even as fiscal and monetary policy positions remain tight in the face of what the Joyce Banda administration calls an austerity budget.

With maize output expected to drop further this year because of dry spells in some parts of the country, inflation will be under more pressure as food prices climb.

Maize, as part of the food component, accounts for about 58.1 percent of the consumer price index (CPI))—a measure that examines the weighted average of prices of a basket of consumer goods and services.

Apart from inflation, rising interest rates—which are meant to stem the general rise in prices, but which could hamper business expansion owing to crowding out effects—is another threat to GDP growth this year.

Cost of borrowing

Since April, the Reserve Bank of Malawi (RBM) has twice raised the bank rate—the rate at which commercial banks borrow from the central bank. RBM first raised the bank rate from 13 percent to 16 percent.

A few weeks later, another adjustment followed, setting the bank rate at 21 percent.

Since the shock devaluation of the kwacha, the local banks have struggled to raise enough money to lend or meet depositor demands, forcing the RBM to rescue the banks through a special non-collaterised discount window at 18.5 percent introduced on June 1 2012 to keep capital flowing in the economy.

These further raised interest rates in commercial banks then put the interest rate at around 24.5 percent.

But a day after the bank rate was raised, the RBM also raised the non-collaterised window to 23.5 percent and commercial banks followed suit to put their base lending rate at around 32 percent.

However, the facility which the RBM called temporary measure expired on July 31 2012.

RBM governor Charles Chuka indicated that continuance of the non-collaterised discount window, if considered necessary, will attract a charge of four percentage points above the banks’ prime lending rate and that additional charges may be imposed if access is considered excessive and/or prolonged.

And because the banks are borrowing at a high rate from the RBM, they have also raised their base lending rates at above 40 percent, making borrowing for both working capital and expansion prohibitive, forcing some businesses to close shop or down-size access to capital takes a knock. This has left a trail of delinquent loans.

Low investment

Investment advisory firm, Nico Asset Managers, agrees that high interest rates have resulted in reduced private sector investment and growth and may also result in increased risk of defaults of existing liabilities.

“An increase in the bank rate could result in a further increase in the base lending rates. This could increase the cost of loan repayments and regress private sector investment and growth,” said the firm.

If the private sector, the goose that lays the eggs is affected, GDP growth may also be under threat of dipping further because businesses contribute substantially to output.

Meanwhile, the kwacha is under extreme pressure and analysts have predicted its freefall because of dwindling foreign currency reserves to anchor it. This is another dent on economic performance.

The foreign currency reserves have been hovering at less than one month of import cover, a situation that may affect the importation of raw materials which could choke private sector growth.

Malawi needs $387 million to meet its quarterly import needs. Internationally, this is the three months minimum import cover that is recommended.

But August 31 2012, gross official reserves stood at $193 million (1.5 months of import cover) whereas private sector reserves hovered around $236 million (1.86 months of import cover).

Poor tobacco sales

Tobacco, Malawi’s principal export crop accounting for about 60 percent of foreign exchange earnings has also not performed well this year. Revenue has shrunk by 40 percent to $176.87 million from last year’s $293 million.

The drop in forex revenue is a blow to Malawi’s economy because the scarcity of foreign exchange which is key to the procurement of essential imports such as fuel, fertiliser and medical drugs is affected; hence, having a domino effect on the overall economic growth.

Given these factors, analysts now doubt Malawi’s capacity to meet the projected growth target.

University of Malawi’s Chancellor College economics professor Ben Kaluwa told Business Review on Tuesday that it is unlikely that Malawi will achieve the projected GDP growth of 4.3 percent.

“We currently have so many constraints in the economy. The agriculture sector has not performed well. Tobacco revenue has shrunk further, fuel cost will also affect the economy and the current foreign exchange rate regime is also another barrier, all these will constrain economic growth,” he explained.

Malawi Economic Justice Network (Mejn) executive director Dalitso Kubalasa on Tuesday also cast doubt on Malawi achieving the projected growth rate.

“Generally, I think it is not easy and automatic to achieve that. We have a long way to go to achieve that uphill task,” he said.

Kubalasa noted that with a number of industrial actions taking place, productivity is likely to be affected and throw back the gains that might have been achieved.

“Despite fuel being available and a number of reforms taking place in the economy, the strikes are stalling productivity,” he said.

Rising food prices

The increase in prices of goods and services has affected consumer confidence, according to Consumers Association of Malawi (Cama) executive director John Kapito. He said with consumers being squeezed, the likelihood of achieving the targeted growth is almost zero.

“The economy is still sailing in troubled waters. A number of economic decisions were effected without considering the consequences. The strikes we are witnessed these days will most likely affect productivity; hence, reducing output,” he said.

Kapito said Malawians have yet to find a formula to survive in the post devaluation era in which people’s incomes have been reduced.

Minister Lipenga could not be reached for a comment on Tuesday as his phones were out of reach.

His counterpart, Minister of Economic and Development, Atupele Muluzi, was also not available for a comment while his deputy Khwauli Msiska suggested that we speak to government spokesperson and Minister of Information Moses Kunkuyu who was also out of reach.

Malawi’s economy grew by an average of 7.5 percent between 2005 and 2010 largely propelled by the success of the Farm Input Subsidy Programme (Fisp), in which small-scale farmers buy seeds and fertiliser at subsidised prices, coupled with good rains.

In 2009, the Malawi economy which grew by 9.8 percent was the fastest growing second to oil-rich Qatar, according to the Economists Intelligence Unit (EIU).

Those good old days are now distant nostalgic memories.