Sputtering economy? Crank up public sector

“In a country well governed, poverty is something to be ashamed of. In a country badly governed, wealth is something to be ashamed of,”—Confucius.

The barefoot walking in our cities, others carrying bundles of grass are a testimony of the levels poverty in Malawi. If you have not seen these, and don’t have time to visit rural areas, a drive to the boundaries of the city will show you a proper definition of poverty.

Doubting economic projections

The latest gross domestic product (GDP) projections and expert opinion indicate a sputtering economic growth a reminder of the 2012 dismal performance.

The World Bank, in its June 2013 Global Economic Report released recently, has pegged Malawi GDP growth at 4.4 percent marginally below the January projection of five percent. Government targets five percent up from the meagre 1.8 percent achieved in 2012.

Economics Association of Malawi(Ecama) executive director Nelson Mkandawire, recently, commenting on the projections, cast doubt on the estimates arguing it was difficult to double the productive capacity of the economy. He however noted that Malawi has enjoyed a good performance in agriculture thanks to good rains and this may ensure better GDP growth than last year.

He pointed out that to achieve the targets the civil service must also work hard because it is key to the economic performance of the country.

Striking a delicate balance

GDP growth—otherwise measured by the market value of final goods and services produced—hinges on variables including consumption, investment, and international trade.

To achieve a proper balance in the economic variables, theory advises authorities to ensure a proper balance in fiscal, monetary and trade policies.

Since December 2012, the cost of finance has been exorbitant partly due to the tight monetary policy and liquidity crunch. The Reserve Bank of Malawi (RBM) has maintained the base lending rate at 25 percent one of the highest in both Malawi’s history and in the region. To control inflation, RBM, has ensured that the money market is free of excess liquidity to strike a balance between real economic growth and money supply. RBM has further maintained the Liquidity Reserve Requirement—money that commercial banks deposit with the central bank—at 15.5percent. The bank has also engaged in money market operations to ensure a discipline to tight monetary policy.

Consequently commercial interest rates are currently hanging at over 40 percent, in effect denying cheap capital for investment to the private sector—the engine of economic growth.

However, experts are expecting a reduction in interest rates due to the improvement in liquidity and the abating inflation.

Inflation rate as measured by the Consumer Price Index (CPI), slowed down to 31 percent in May 2013, but still one of the highest in the country’s history and in the region and thus a deterrent to investment and consumption.

The CPI—in the wake of the liberalisation of the kwacha exchange rate in May 2012, worsened by maize shortage in the lean months of November to March—peaked at 37.9percent in February 2013, slowed to 36.4 in March, declined to 35.8 percent before dropping to the latest 31 percent.

The decline in inflation rate is good news as it will improve real incomes, induce an increase in demand for goods and services and prompt economic growth.

International trade—exports and imports—is usually a reflection of output and demand of the domestic economy.

Malawi trade deficit, according to the African Development Bank, has worsened over the past 10 years. According to the Tunis based institution, Malawi has suffered a trade deficit—imports dominating exports—averaging 14 percent between 2003 and 2011. The poor trade balance therefore calls for an urgent expansion of the export base.

Promises, reforms

In the adopted budget ‘dubbed transitional and recovery’ budget, government commits itself to uphold both fiscal and monetary policy therefore ensuring an achievement of economic growth and development.

“In order to remain on track on our programme to reduce inflation and stabilise the exchange rate, government has in the past relied on monetary policy. Beginning from the 2012/13 fiscal year, government planned the fiscal policy, so that it complements its critical role, just as the monetary policy in dealing with inflation and exchange rate. You will agree with me that in the past, programme targets were missed primarily on account of loose fiscal stance. In order to sustain and build on the gains achieved so far, the fiscal policy will have to remain very tight in the coming year,” said Minister of Finance Ken Lipenga in the budget statement.

That’s at least government has promised the moon as far as monetary and fiscal policy is concerned.

The Ministry of Industry and Trade has announced reforms reducing the number of products requiring exports permits from 25 to 10. In a press release signed by Minister of Trade Sosten Gwengwe, the reforms are part of the implementation of the National Export Strategy (NES).

The reforms are welcome bearing the trade deficit the country has been experiencing and the doing business ranking.

For starters, Malawi, in the World Economic Forum (WEF) Africa Competiveness Report, scored an anaemic 3.4 and ranked 129 out of 144 economies, slumping from 117 from the previous report.

Malawi also slipped three steps on the WEF 2013 Travel and Tourism Competitiveness Index, from 121 to 124 out

of 140 countries.

The country also slumped by an overwhelming 13 steps on Information and Communications Technology 2013 uptake moving from rank 116 last year to 129 out of 144 economies.

In the 2013 World Bank Doing Business Report, a survey that analyses regulations that apply to an economies business’ life cycle, Malawi tumbled six steps to 157 out of 185 economies.

That’s the commitment to fiscal and monetary policy, the reforms to doing business is set to spur economic growth—at least based on the commitments and promises made so far.

Reconciling economic growth and development

Amarta Sen—the renown philosopher and economist—points out that economic growth is [just] one aspect of the process of economic development.

Economic development generally refers to the promotion of standards of living and economic health as opposed to—GDP—mere creation of wealth.

Thus policies must involve the development of human capital, critical infrastructure, social inclusion, and improvement in literacy levels.