As the year 2024 ends at midnight tomorrow, Malawi’s economy continues to face serious challenges.
Inflation is at record high, government debt has grown, and policies meant to stabilise the situation seem to be falling short.
The disconnect between fiscal policies (government spending and borrowing) and monetary policies covering interest rate adjustments by the Reserve Bank of Malawi amd the exchange rate has been a major factor in the country’s struggles this year.
Inflation hits new heights
Inflation, the rate at which prices of goods and services rise, reached a shocking 33 percent in 2024. This is far above the Reserve Bank of Malawi’s (RBM) target of five percent and higher than the 27 percent projected by the central bank in March 2023.
The RBM raised its policy rate, the interest rate commercial banks pay to borrow from the central bank, to 26 percent from 24 percent in January to control inflation. Unfortunately, prices kept rising.
Why hasn’t this worked? Economics consultant and researcher Exley Silumbu says one reason is that the government has been borrowing heavily from the private sector to cover its budget deficit.
This borrowing pumps more money into the economy, which increases inflation, even as the RBM tries to reduce it by raising interest rates.
Debt levels create pressure
Malawi’s debt reached 80 percent of its total economy (GDP) this year, a level many experts say is unsustainable.
“Much of this debt is in foreign currencies, which makes it more expensive to repay when the local currency loses value,” National Working Group on Trade and Policy chairperson Fredrick Changaya said in a telephone interview.
“Frequent devaluations of the kwacha, including a 44 percent drop in 2023, have made things worse by increasing the cost of foreign debt.”
The World Bank noted that government borrowing and the falling value of the kwacha are weakening Malawi’s economy.
To help stabilise the situation, the central bank required a financial boost of K704 billion (4.4 percent of GDP) just to balance its books after suffering losses from currency devaluations.
A need for reform
Experts agree that Malawi’s current economic approach needs to change.
National Planning Commission (NPC) director general Thomas Chataghalala Munthali suggests charging higher interest rates for government borrowing compared to private sector borrowing.
He said: “This would discourage the government from borrowing too much and make it easier for businesses to access loans at lower rates.”
The private sector, key to economic growth, is struggling. Loans for businesses and individuals come with high interest rates of 30 to 39 percent, making it almost impossible for businesses to invest in agriculture, manufacturing and other productive areas.
Private sector credit in Malawi is only 20 percent of GDP, far below the average of 46 percent for other low-income countries.
Inflation requires a broader strategy
Economics Association of Malawi (Ecama) president Bertha Bangara-Chikadza said inflation cannot be controlled by monetary policy alone.
“Malawi relies heavily on imports for essentials like fuel, fertiliser, food, and medicine. When the kwacha loses value, these imported goods become more expensive, creating imported inflation,” she said.
This type of inflation is hard to control by simply raising interest rates.
While the RBM’s policies have somewhat reduced non-food inflation to 22 percent, supply-side problems, such as high import costs and poor exchange rate management continue to drive overall inflation higher.
The way forward
Malawi’s economic problems require coordinated solutions. Experts recommend reducing government borrowing, stabilising the kwacha and creating a better environment for private businesses. Encouraging private sector investment would help the country grow its economy and reduce its reliance on debt.
Reforms such as setting different borrowing rates for the government and private sector, as well as improving fiscal discipline, could help stabilise the economy. Without such changes, Malawi risks falling deeper into economic instability.
As 2025 approaches, the need for bold action is clear. Addressing inflation, managing debt, and supporting private sector growth are critical steps for Malawi to achieve long-term economic stability.
