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When Malawi’s economy wears a sombre mood

That the domestic economy withstood turbulences in 2014 is a common sentiment shared by both International Monetary Fund (IMF) and the senior government officials. In fact, a team from IMF led by Oral Williams that visited Lilongwe from October 29−November 12 2014 to conduct discussions for the fifth and sixth reviews under Malawi’s three-year Extended Credit Facility (ECF) arrangement said it all.

“Indications are that economic activity has demonstrated considerable resilience. Real gross domestic product (GDP) growth for 2014 is projected at between five and six percent, with contributions from agriculture and retail trade sectors,” said Williams.

Floods will have a devastating impact on the economy
Floods will have a devastating impact on the economy

True to their projections, the economy is said to have grown by six percent last year, a threshold which economists believe impacts meaningfully in poverty reduction.

In 2014, most economic indicators were in the red. The economy had little or no breathing space.

Why? Policy implementation took place under difficult circumstances.

Severe shortfalls in budget support were evident due to Cashgate and that led to challenges in the execution of the 2014/15 budget, increasing recourse to costly domestic financing and the accumulation of significant domestic debt.

Drifting into 2015, seemingly end is not in sight as to when economy will stabilise or reach normality.

Economic woes refuse to subside

By January 2015, it was apparent that most macroeconomic indicators were not pointing to stability anytime soon and the situation remains the same now.

Inflation and interest rates remain high; Treasury is still grappling with a huge amount of arrears owed to the private sector while sitting on a huge amount of public debt, among others.

Headline inflation rate for December 2014 was at 24.2 percent compared to 23.5 percent recorded during the same period last year [December 2013], according to the National Statistical Office (NSO).

But at a rate of 24.2 percent, inflation rate is still in galloping levels and this means that consumers are paying the price as their disposable income allow them to purchase few goods than was the case in December 2013.

The average annual headline inflation rate for 2014 stood at 23.8 percent compared to the average annual headline inflation of 27.3 percent in 2013, according to NSO computation.

Finance, Economic Planning and Development Minister Goodall Gondwe is still haunted by the piling up of economic challenges that have gripped the economy.

He admitted last week in Parliament that inflation is still high, interest rates are also high, adding that economic activity is dampened.

“The economy, as is well known by all, is still passing through turbulent times in that although there are encouraging signs that we are succeeding to stabilise it, we are yet to reach a sustainable macroeconomic environment,” said the minister.

The economy would be deemed stable only when inflation and interest rates will be low, exchange rate variability is narrow and predictable foreign exchange availability is permanently assured.

But with inflation rate still high, the rate could only decelerate later during 2015 if and only if the kwacha appreciates further or stabilises, global oil prices remain low and the aftermath effects of the recent reduction in local fuel prices trickles down.

Tellingly, end is not in sight as Gondwe hints that government will likely revise some key macroeconomic targets such as inflation, foreign exchange, interest rates and the national budget largely due to the impact of the flood disaster.

Renowned economist Thomas Munthali, who is a former president of the Economics Association of Malawi (Ecama), said that high interest rates are likely to remain as long as inflation remains high.

He thinks that the continued suspension of budget support to Malawi is a huge blow to the domestic economy as it leaves a huge fiscal gap to be filled by domestic resources.

“While donors may come back at the back of efforts being made by authorities to deal with Cashgate cases and ensuring that financial management system loopholes are being sealed, it is safer for authorities to move on the assumption that no donor support will be forthcoming,” he said.

Disaster dents economic prospects

By now almost all and sundry agree that the disaster that struck the country in form of floods will hard-hit the economy by slowing down economic activity.

“I can’t tell you to what extent but from a qualitative point of view, the disaster will have a negative impact [on the economy],” said Gondwe, who described the disaster as “a big blow.”

He said it is inevitable that in the next six months, the budget will be heavily affected by the disaster.

“I suspect that our projections on inflation rate, foreign exchange, interest rate are going to be affected by the disaster,” he said.

Apparently, Gondwe joins the bandwagon of other economic commentators who forecast that 2015 GDP growth rate projection is under pressure and that the probability of revising the forecast is quite high.

IMF earlier projected that the economy will grow by 5.8 percent this year, a 0.2 percentage points shy from last year’s rate.

That the floods have wreaked havoc on power availability is obvious and economist Edward Chilima, who is a former president of the Economics Association of Malawi (Ecama), contends that incessant power cuts coupled with water shortages will have a serious economic impact going forward, as producing entities slash their capacity utilisations to low levels.

This is a blow to the economy, which recently showed some signs of being on the path to revitalisation.

Weighing in, head of economics at Catholic University Gilbert Kachamba believes the economy is wobbling in danger zone with the disaster as physical capital has fallen dramatically, with people shifting focus to disaster and not other equally important tasks to build economy.

He also warns that government should brace for more tough times as the disaster means it has to spend more money in rebuilding the damaged schools, roads and other public amenities.

Nico Asset Managers Limited, in a latest commentary, explains that late rains and the damage to crops caused by the recent heavy rains could have a negative impact on agricultural output, which would add pressure to food inflation.

Export growth gagged

There is a huge risk ahead in as far as growing Malawi’s export base this year and beyond is concerned. For a country already reeling from a huge trade gap, this is no sweet news at all.

The first blow emanates from the continued suspension of production and exportation of uranium on the international market.

Paladin [Africa] Limited announced the suspension of uranium production at Kayelekera Mine in Karonga in February last year, before announcing a stop in uranium exports in May last year.

That has a huge bearing on Malawi’s export buffer, analysts warned earlier.

Now with most crops washed away, although the magnitude of the damage is yet to be quantified, the economy finds itself in an awkward position as Malawi may find little to export to the international market as crops such as tobacco, sugar and tea have been damaged by the floods in some areas.

The export growth is under pressure this year despite the already existing widening trade gap each year.

The performance of the external trade sub-sector, in terms of trade balance, has worsened in the past three years. The overall trade deficit has been widening from K167.4 billion in 2011 to K368.4 billion in 2012. The deficit stood at K595.9 billion in 2013, according to the 2014 Malawi Government annual economic report.

Way forward

Economic commentators, including representatives from the donor community are of the view that government needs not to relax but remain aggressive in addressing and fixing economic woes.

For instance, African Development Bank (AfDB) country representative Andrew Mwaba urged authorities to work hard in formulating public finance management and also ensure that the IMF programme is back on track.

Economist Munthali also has a piece of advice worth adhering to. “There is need for MRA [Malawi Revenue Authority] not to relax in collecting revenue optimally while at the same time government needs to continue with fiscal discipline.”

Fiscal indiscipline, according to Munthali, is the main culprit for inflation, which hurts the common person and businesses.

Authorities need not to be reminded that a weak export base is suicidal to the economy as it affects the kwacha’s stability against major trading currencies; hence, need for rigorous diversification alongside tobacco and other few traditional products.

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