As 2024 comes to a close, Malawi’s economic landscape has been marked by both challenges and glimpses of resilience. Trade dynamics, particularly the balance between imports and exports, have played a central role in shaping the nation’s economic outlook.
Key developments throughout the year reveal a complex interplay between rising import costs, export performance, currency volatility, and forex reserves.
Widening trade deficit, implications
One of the most significant concerns in 2024 has been Malawi’s persistent trade deficit, which reached a concerning $1.7 billion by the third quarter.
This deficit poses substantial risks to the economy, particularly in relation to the local currency, the kwacha, and the country’s foreign exchange reserves. With imports at $2.4 billion and exports lagging behind at $651.6 million, analysts have raised alarms over the sustainability of such an imbalance.
The most significant pressure has come from essential imports, notably fuel, fertiliser, machinery, and printed books, which saw a marked increase in the latter half of the year.
This surge, particularly in September, when imports peaked at $361.4 million, was partly driven by global price hikes, compounded by Malawi’s reliance on foreign goods for domestic production and consumption.
Economic analysts, including Catholic University’s Derrick Thomo and Velli Nyirongo, have warned that this widening deficit will likely continue to undermine the stability of the kwacha.
He specifically pointed out that the widening gap between exports and imports will increase the demand for foreign currency, exacerbating the pressure on Malawi’s already strained foreign exchange reserves.
Velli Nyirongo, a Scotland-based Malawian economist, has raised the alarm about the cyclical nature of the crisis. The depreciation of the kwacha leads to higher costs for imports, further exacerbating the trade deficit, which in turn weakens the currency even further. This self-perpetuating cycle could have severe consequences, such as inflationary pressures and reduced investor confidence.
While Malawi’s total forex reserves did experience a slight increase from $544.8 million in September to $560.3 million in October, they remain insufficient, especially when compared to the previous year’s reserves of $641.1 million in the same period.
The low import cover, approximately 2.2 months of imports, has further limited the central bank’s ability to stabilise the exchange rate or meet international debt obligations.
The role of tobacco in export growth
Despite these challenges, 2024 also saw significant growth in exports, largely driven by the tobacco sector. In the third quarter of 2024, total exports surged to $391.3 million, up from $124.8 million in the previous quarter. Tobacco exports, in particular, saw a dramatic rise, reaching $259.4 million compared to just $32.7 million in the second quarter.
This spike was attributed to the annual tobacco marketing season, which played a crucial role in offsetting some of the negative impacts of the widening trade deficit.
This export growth highlights the importance of the tobacco sector to Malawi’s economy, but it also underscores the risks of over-reliance on a single commodity. The fluctuations in global tobacco demand, as well as environmental factors like climate change, could pose future challenges for the sector and the broader economy.
While tobacco exports provided a much-needed boost in 2024, the increase in imports, especially in fuel and fertiliser, still represents a threat to Malawi’s trade balance.
Imports in the third quarter rose to $931.8 million, up from $777.9 million in the previous quarter, suggesting a growing reliance on foreign goods that may further strain the country’s forex position.
Outlook for 2025
Looking ahead, Malawi faces a delicate balancing act. On the one hand, the increase in tobacco exports provides some optimism, but on the other, the widening trade deficit and persistent pressures on the local currency present significant risks to the economic stability of the country.
It further shows that the country’s drive to diversify exports, as enshrined in the second iteration of the National Export Strategy (NES II), have not yielded meaningful results. The strategy, launched three years ago, seeks to boost the share of exports to 20 percent of gross domestic product (GDP) by 2026.
Based on current data, Malawi generated $950 million (about K1.6 trillion) in one year leading up to the end of the third quarter in 2024, a far cry from the threshold prescribed in NES II.
In conclusion, 2024 has been a year of mixed fortunes for Malawi’s economy. While the trade deficit and forex pressures remain a cause for concern, the growth in exports, particularly in tobacco, has provided a glimmer of hope. The year ahead will require a concerted effort from both policymakers and the private sector to navigate the challenges and capitalise on opportunities for growth and stability.
