Subdued credit to firms dents growth prospects

The implementation of Malawi 2063 (MW2063), the country’s long-term development strategy, took a major hit in 2023 after sluggish economic growth and reduced creditworthiness constrained private sector credit to the manufacturing sector.

Figures contained in the Reserve Bank of Malawi (RBM) monthly economic reviews published between January and December 2023, show that credit extended to the manufacturing sector stood at K1.17 trillion, representing 10.83 percent of the K10.8 trillion extended to the  private sector.

This was the lowest amount of credit extended to the sector. To put it into context, agriculture, fishing and mining sector got about K1.86 trillion or 17.28 percent, wholesale and retail trade got K1.88 trillion or 17.43 percent while community, social and personal services got K4.12 trillion or 38.22 percent of the total credit.

The credit to the manufacturing sector relative to total private sector credit slumped from 12.9 percent in January to 8.2 percent in May, the lowest point in the year, before rebounding to 12.8 percent in October 2023.

Speaking in an earlier interview, National Planning Commission director general Thomas Chataghalala Munthali called for increased funding to the manufacturing sector to enhance productivity.

He said: “We need investment in infrastructure such as  large-scale irrigation and value addition.

“Without that, we will not achieve our dreams, especially in an environment where most local firms are struggling to access foreign exchange for raw materials and other investments.”

He urged government to “trailblaze and lead investment in these critical sectors”.

Mwapata Institute executive director William Chadza said reduced credit to the manufacturing sector resulted from the subdued economic growth that followed disruptions to economic activity caused by the Covid-19 pandemic and thereafter Cyclone Freddy.

He said firms in the manufacturing sector have experienced a “difficult time” with the rise in the cost of borrowing and shortage of foreign exchange which affected importation of raw materials.

Said Chadza: “A sluggish overall economy has impacted the manufacturing sector’s creditworthiness.

“Reduced demand for manufactured goods, lower consumer spending and weak business performance can make banks more reluctant to provide credit to manufacturing firms.”

He said reduced funding to the private sector can potentially undermine the implementation of MW2063, which has targeted industrialisation as a key driver of national economic growth and transformation.

The National Export Strategy II that runs from 2021 to 2026 is also anchored on industrial development through manufacturing value-added products for exports.

Economic expert Dalitso Kubalasa said the potential rise in credit to the manufacturing sector can trigger economic growth and unlock its potential as a driver of economic development.

He said: “If sustained and followed through, such trends can trigger the necessary cycle so needed towards the inclusively wealthy Malawi, with an inclusively growing economy, further reducing the negative trade balance bedeviling Malawi in the recent decades.”

Kubalasa, a former executive director at the Malawi Economic Justice Network, but now a public resource management expert at the Parliament Support Programmes by Democracy Works Foundation and Democracy International, urged caution considering that RBM had just devalued the kwacha by 44 percent in November 2023.

Economics Association of Malawi president Betchani Tchereni said the changes in the sectoral composition of credit do not necessarily signify a desire to expand production, but rather reflects the desire to cater to existing costs.

“The growth we are seeing there is a result of the devaluation of the kwacha and a rise in inflation,” he said.