Malawi

major macro economic indicators

(e): Estimate (f): Forecast *Fiscal year 2021 from 1st July 2020 to 30th June 2021 / Grants included

RISK ASSESSMENT

Growth driven by the agricultural sector

Economic growth, while not reaching pre-pandemic levels, will increase in 2022 as agricultural production regains momentum. Although the outlook for agriculture, which accounts for 23% of GDP, will remain subject to the vagaries of the weather, the sector will be supported by subsidies, notably through the Affordable Input Programme (AIP), which will boost production, mainly of maize. With 76% of jobs linked to agriculture, this recovery will support household consumption (64% of GDP). However, purchasing power will be constrained by high inflation due to depreciation of the Malawian kwacha, which is pushing up the import bill. Stronger private consumption would allow the services sector to continue its recovery in 2022. Public investment, which is mainly focused on infrastructure development (roads, power and irrigation), will also drive growth. The World Bank-funded Mozambique-Malawi regional interconnection project, for example, includes the construction of a high-voltage power line to supply businesses and households. The development of the mining sector could attract private investment, such as the Kaniyka niobium project, which would be the first niobium-mining project in Africa. However, these investments will continue to be severely affected by weak energy supply (70% of the country's electricity is generated by hydroelectric plants) and the difficult operating environment. Trade’s net contribution to growth will remain negative, as the increase in agricultural exports, which are dominated by tobacco (53% of export earnings), tea and coffee (10%), will be tempered by rising imports, driven by domestic demand.

Increased risk of debt distress

Despite an increase in tax revenues linked to accelerating growth, the government deficit is expected to grow in 2022. Expenditures, which were already high, will continue to rise as part of investments under the Malawi III growth and development strategy. In addition to increased spending on infrastructure, agricultural subsidies under the AIP programme will weigh heavily on the public deficit. Financing the deficit requires increased recourse to debt, particularly domestic debt, which covers 85% of the financing requirement. Consequently, the public debt continues to grow. The increase in the domestic portion (22% of GDP), which is mainly held by commercial banks, is a major contributor to high interest rates, which are set to absorb more than 27% of the government's projected domestic revenues in 2021/22. Moreover, although the majority of debt is still held by multilateral creditors (nearly 60% of external debt), non-concessional loans from regional development banks (notably Afreximbank) are also contributing to the increase in debt service. The risk of debt distress is extremely high.

The current account deficit, which is structurally large because of the country's dependence on imports of fuel, capital goods and fertilisers, is expected to decrease slightly. The trade deficit will narrow only marginally, as the increase in export earnings (tobacco, tea, sugar) linked to the recovery in external demand and strong performances in agricultural production will be partly offset by imports. The services deficit will widen with the upturn in payments for transport services. The primary income deficit, linked to profit repatriation by foreign companies, will continue to weigh on the current account balance, while the current transfers surplus will be driven by expatriate remittances (about 8% of GDP). The country will continue to rely on external development assistance to finance the current account deficit. The authorities may seek a new programme with the IMF in 2022. The large current account deficit is putting pressure on the Malawian kwacha, which depreciated by more than 6% in 2021 and on the foreign exchange reserves, which represent less than six weeks of imports.

The new government is already facing a tense social climate 

After the country’s Constitutional Court annulled the 2019 presidential election on the grounds that the results had been tampered with, Lazarus Chakwera, leader of the Malawi Congress Party (MCP), won the new presidential election in June 2020, securing 59% of the vote ahead of incumbent president Peter Mutharika, who had been in office since 2014. The MCP holds 59 seats out of 193 in parliament and is expected to continue to lead a minority government with support from the United Transformation Movement (five seats), the People's Party (also five) and 33 independents, while the Democratic Progressive Party is now the main opposition party. The new government is already facing a tense social climate, aggravated by the COVID-19 crisis. Public discontent is fuelled by endemic poverty, corruption scandals, mismanagement of public funds and poor public services. Against this backdrop, protests against the rising cost of living erupted in November 2021, resulting in violent clashes with police. Prices of basic goods and the threat of COVID-19 are expected to remain a major source of social unrest in 2022.

The authorities are seeking to strengthen ties with China, which already holds half of the country's bilateral external debt and which is, for instance, financing a coal-fired power plant in Kammwamba, in southern Malawi.

Last updated: February 2022