Malawi’s 2012 GDP to slow down

Malawi’s real gross domestic product (GDP) for 2012 is likely to slow a seven-year low of between two and three percent on account of low tobacco revenues, high inflation and credit contraction as a result of high interest rates, the National Bank of Malawi (NBM) has said.

This would be one of the lowest economic growth rates since 2005 when economy expanded by a paltry 2.1 percent impacted by drought that affected the agriculture sector, the main driver of the Malawi’s growth.

Government revised downwards the economic growth to 4.3 percent from 6.9 percent, largely affected by macroeconomic and structural challenges.

The forecast by NBM, the Malawi Stock Exchange (MSE)-listed largest bank by assets and market capitalisation, confirms doubts by economic analysts who spoke to Business Review last week that Malawi does not have capacity to achieve the 4.3 percent targeted growth in 2012 announced by Finance Minister Dr Ken Lipenga in the 2012/13 national budget.

The analysts observed the economy is in engulfed in a myriad challenges to achieve the stated growth rate, arguing economic growth will even be lower than projected.

In its economic newsletter for September 2012, NBM notes that the 2012 tobacco season has seen record low volumes of 79.8 million kilogrammes (kg) of tobacco sold against a record 237 million kg last year.

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.

“This turnout underscores the importance of prices to production as farmers shifted to production of other cash crops and away from tobacco due to the low prices and high rejection rates experienced in the 2010/11 auction season,” the reads the newsletter.

Cost of strikes

But the bank says pressure on prices (inflation) eased slightly in July due to a reduction in fuel prices although it peaked at 21.7 percent up by 1.6 percent from 20.1 percent in June, according to the National Statistical Office (NSO). This is well ahead of the annual forecast of 18.4 percent.

“Currently, indications are for cost-push inflation to intensify given the concessions government is making for public sector organisations on wage increases. Even those that were already awarded are continuing to stage wild cat strikes demanding even more increases.

“These pay accommodations may result in a wage-inflation spiral which may derail government’s austerity budget announced in June 2012,” says the bank, adding that restoration of the previous purchasing power of the kwacha through wage increases may result in the reversal of gains made, and the devaluation would then be meaningless.

As if that is not enough, the bank says the situation may turn worse if global fuel prices start to increase, which may then mean further local increases in the local pump prices.

Bank rate woes, devaluation

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, settling the bank rate at 21 percent.

Since the 49 percent shock devaluation of the kwacha and its subsequent floatation on May 7, 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 of the particular bank 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 as high as 45 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.

NBM says the discount window accommodation by RBM despite being a temporary measure is still a feature for most commercial banks.

It, however, says in the week ending August 31 2012, there was a 42 percent reduction in amounts borrowed at K11 billion down from around K19 billion.

“This perhaps is a sign that distressed banks are beginning to curb their appetite to lend, in response to the onerous requirements of the terms of the facility. This is presumably in line with the key monetary objective of the Reserve Bank of Malawi to limit the growth in money supply and demand of foreign exchange,” said the newsletter.

The bank says the RBM seems to be reluctant to either to heed some commercial banks’ plea to reduce the Liquidity Reserve Requirement (LRR)—the amount of clients’ deposits held with the central bank at no interest—to improve the liquidity levels in commercial banks to facilitate credit expansion.

LRR is currently at 15.5 percent and has been there for a number of years now.

“This line of thinking [to reduce the LRR] may be understandable given the fact that any credit expansion will inevitably lead to increased money supply growth and foreign exchange demand which the country can ill afford; hence, leading to further depreciation of the local currency,” says NBM.

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.

Malawi’s economy is currently riddled with a number of problems. 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 blow to the economy.

Given these factors, analysts last week doubted Malawi’s capacity to meet the projected growth target.

University of Malawi’s Chancellor College economics professor Ben Kaluwa said it is highly unlikely that Malawi will achieve the projected GDP growth of 4.3 percent, adding that the economic ills currently at play will constraint economic growth.

Malawi Economic Justice Network (Mejn) executive director Dalitso Kubalasa also cast doubt on Malawi achieving the projected growth rate, arguing the achievement of the targeted growth rate is not easy and automatic.

Consumers Association of Malawi (Cama) executive director John Kapito noted that high inflation has affected consumer confidence, saying consumers are being squeezed and 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 witnessing these days will most likely affect productivity; hence, reducing output,” he said, adding that Malawians have yet to find a formula to survive in the post devaluation era in which people’s incomes have been reduced.

Government officials have not yet commented on the expected subdued economic growth.

But President Joyce Banda and her cabinet over the weekend agreed to roll-out an 18-months economic recovery plan (ERP) designed to cushion economic problems Malawians are entangled in.

Government says it has identified some ministries as major drivers of the ERP.

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).