Slowly, the economy is turning the corner

A few weeks ago, an International Monetary Fund (IMF) mission that came to assess Malawi’s economic programme signalled that the country’s economic situation is in a much better shape than in several years.

Indeed, there are a lot of indications showing that something positive is happening in the economy—and must be acknowledged.

The barometer of the country’s economic activity—the Malawi Stock Exchange (MSE) was bullish in the first quarter of 2017, with the Malawi All Share Index (Masi) jumping 9.44 percent over the last quarter, which shed 8.35 percent.

What is interesting is that most of the Masi gains came from companies operating in the key sectors of tourism, manufacturing, financial services, telecommunications and real estate.

This could mean that investors have broad-based positive sentiments across industries, which is always an encouraging sign.

When you look at inflation, things are getting better there as well. In February, average inflation slid to 16.10 percent from 18.20 percent in January 2017.

With the food situation improving markedly and maize prices nose-diving, the general rise in prices can only slacken its pace, raising hope of a single digit inflation if the current drops can be sustained.

Of course, the biggest threat to the country’s inflation outlook at the moment could be global oil prices, what with rising tensions in the Middle East and the Korean Peninsula.

But for now, Malawi’s inflation outlook has never looked better. In fact, the outlook is so promising that the Monetary Policy Committee (MPC) of the Reserve Bank of Malawi was confident enough last month to cut the policy rate by two percentage points to 22 percent although, out of an abundance of caution, the monetary authorities left the Liquidity Reserve Requirement intact at 7.5 percent.

We have already seen reciprocal cuts in the base-lending rates by commercial banks, which has softened the cost of borrowing for both consumption and investment. Chances are high that after Parliament approves the next budget, the central bank could further slash the policy rate to encourage more reductions in lending rates from the current 30-32 percent range to stimulate the economy through enhanced investment and consumption.

Already, the IMF is projecting growth in gross domestic product (GDP) of between four and five percent in 2017.

While this is not as solid as a developing country like Malawi requires, it could be the best performance in years.

The kwacha may have softened somewhat, but the depreciation levels appear remarkably contained and mild—less than one percent between December and now. Given that we are just out of the lean period, the kwacha has shown a depth of resilience we have not seen in years.

With the tobacco marketing season opening for business, the local currency will begin to gain on its traditional trading currencies.

Thus, the key macroeconomic indicators signal that the 2017/18 national budget will be built on a stronger base than its past five predecessors.

But as he finalises his next budget, Finance, Economic Planning and Development Minister Goodall Gondwe may do well to tackle some glaring risks to the gains the economy has made.

As I pointed out recently in this column, the first risk is unreliable power supply. This could hit productivity hard, thereby slowing down businesses and dragging the economy back to the brink.

It will be crucial that the budget must have a clear strategy for dealing with the power crisis both in the short and long-term.

The second risk is the election fever. Polls are two years away, but it is clear that the campaign has begun.

Suddenly President Peter Mutharika is covering more kilometres per day than at any point in his presidency.

Most importantly, as the count-down begins, the Democratic Progressive Party (DPP) administration will be in a hurry to fulfill its promises as well as try to please everybody.

Thus, government could end up spending recklessly, including using money it does not have. Consequently, Treasury could indulge in heavy domestic borrowing, which will be really bad for the economy.

Also watch out for fraud, which Gondwe himself has admitted could hinder budget implementation.

And as I mentioned earlier, global oil prices could rise dramatically, which could hurt the economy badly. While the potential oil price shock is hard to control, we can at least build into the budget some mitigation measures to try and soften the blow. For a start Malawi Energy Regulatory Authority (Mera) must get back our money from Admarc to help rebuild the price stabilisation war chest.