‘Economic situation will remain difficult in 2013’

There is pessimism among some Malawians that the economy might not improve in 2013. Is this view informed? Bright Mhango asked Chancellor College economics professor, Chinyamata Chipeta, for an informed perspective on the prospects of the Malawi economy in the New Year.

Do you agree with people who think the economy will continue to slide in 2013?

They are right, but only partially. They are wrong in not considering the expected recovery in economic activity. The total output of goods and services produced in the country, or what is called gross domestic product (GDP), is anticipated to rise in 2013.  The rise in GDP will stimulate employment creation. 

This optimism is based on expectations of better weather conditions for farming, an expanded farm input subsidy programme, and incentives to export created by exchange rate depreciation, which will result in an increase in food and cash crop production and exports. Along with an increase in aid, which is expected, increased exports will boost foreign exchange availability.

How right is this pessimism?

They are right in that the anticipated economic recovery (indicated by a 5.5 percent growth rate forecast for 2013) is not enough and will not translate into improved standards of living for the majority of the people. Availability of food and other goods and availability of services are expected to improve further. However, the country’s foreign exchange position is not expected to improve significantly. The exchange rate will, therefore, continue to depreciate. This will translate into increased cost of importing inputs and consumer goods. So, inflation will remain high and erode gains made by increases in farm and other incomes and wage adjustments accruing to those in employment.

What do you think needs to happen for the economy to change for the better?

The economy will change for the better only in the real sector (the industries that produce goods and services). The economic environment supporting the industries that produce goods and services will remain unfavourable.

It will need improving by increasing availability of foreign exchange, engendering stability in the exchange rate, reducing inflation, reducing interest rates, and reducing budget and balance of payments deficits.

Is the country’s Economic Recovery Plan (ERP) enough to recover the ill economy?

In the short term, no. In the medium and long term, yes. Most of the measures in the ERP will take time to bear fruit.

 

What else can be done?

Studies show that long-term economic growth in Malawi, as in other countries, is largely driven by physical capital accumulation or investment. So, policies that stimulate investment in this sense are of particular importance. Human capital accumulation has so far contributed less to economic growth, so we need to find ways of improving its contribution. Particularly worrying is that the contribution of total factor productivity to growth is negligible. We need to find ways of improving the productivity of physical, human, financial, natural and social capital in all sectors of the economy.

Do you think we have good leadership to steer the economy to prosperity?

Yes. We have leadership that is creating the right political environment for economic development. We need this. By reversing laws and decisions that undermine the rule of law, the current presidency has demonstrated that it is committed to is democracy.

How can you sum up Malawi’s economic outlook in 2013?

The economic situation will remain difficult in 2013. The economic measures adopted under the Extended Credit Facility and the ERP cannot and should not be expected to turn around the economy overnight.  Therefore, it is not right to put blame on the current policies for lack of instant improvement. These policies, which will take time to have the intended impact, are correcting a situation which should by now have become much worse. In other words, we were not going to be better off without them.

Lastly, I have a word or two about macroeconomic policies. So far, monetary policy has borne the brunt of containing demand pressures in the economy. The role of fiscal policy has been muted, both on the revenue front and on the expenditure front.  Yet, the conventional view is that monetary policy is not as robust as fiscal policy partly because, for example, any action to mop up excess liquidity is offset by fresh credit to government by the central bank.

In the next national budget, one hopes that things will change with more attention paid to ways and means of controlling revenue and expenditure, desisting from increasing foreign travel allowances, desisting from lowering tax liability for certain income groups, and by making personal income taxation more progressive.

 

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