Change of economic gear

In July, the IMF approved the loan to the small, land-locked African nation of 18 million people to entrench the pre-existing macroeconomic stabilisation policy and speed up reforms designed to make the economy more dynamic. Malawi is one of the world’s poorest countries, with a total GDP of only US$6.7bn.

The new facility led to an immediate disbursement of about US$16m. The remaining amount will be phased over the duration of the programme – subject to semi-annual reviews – giving the IMF considerable influence over the country’s macroeconomic policies. It follows the conclusion of another US$147.5m ECF programme last year (approved in July 2012).

“The first programme was all about stabilising the economy,” said Jookyung Ree, the IMF’s resident representative in Malawi. “The new one is about switching gears, speeding up structural reforms, so that the country creates the right enabling environment for the private sector to play a much bigger role in the economy.

“Malawi was in such a distressed state in 2012 when the first programme began, it was like a hospital patient who was unconscious. That patient is now awake but has very thin muscles and must grow. The next few years will be all about entrenching the stabilisation programme and creating private sector confidence in the government.”

The economy recently rebounded after two years of drought in 2015 and 2016. Growth picked up from 2.3% in 2016 to an estimated 4.0% last year, as agricultural production bounced back. Inflation has been reduced to below 10% – from 21.7% in 2016 and 21.8% in 2015 – owing to the stabilisation of food prices, prudent fiscal and monetary policies, and a stable exchange rate. The current account deficit narrowed to 10% of GDP last year from 13.6% in 2016, following lower maize imports and higher prices for some exports.

The IMF says that a pick-up in inflation to 9.9% in March this year was a wake-up call, indicating that the risk of a reversal in the recent inflation decline is real. It proves that the macroeconomic policy should focus on entrenching the recent gains in stability. This means reigning in a budget deficit that increased significantly in the first half of the 2017 to 2018 fiscal year because of revenue shortfalls and spending overruns. It will also require continued caution in the conduct of monetary policy, including in the Reserve Bank of Malawi’s interest rate decisions (the current base rate stands at 16%).

Another key challenge is whether the country can reinforce public finance management reforms. Under the last ECF programme, the authorities reconciled the government’s cash book with its bank accounts, probably for the first time in Malawi’s history. The new ECF programme wants to make this an almost automatic process in future years. It also plans to resolve past arrears once and for all.

Developing situation

“The objective of the next five years is to remove Malawi from this cocoon of being one of the world’s least developed nations,” said Goodall Gondwe, aged 81 and the country’s minister of finance since 2014. “We would like to bring the economic growth rate up to 7% annually during the next five years. It is ‘doable’. This can be achieved in a number of ways. There have been bad power shortages. We plan a major upgrade in the country’s electricity infrastructure during the next 10 years. A great deal of industry has become dormant; we want to resurrect it.

“Much better irrigation systems could lead to economic growth of up to 9% annually. We want to see an uptick in mining activity. Tourism also offers great opportunities.”

A lack of electricity has become one of the biggest hurdles to the private sector in Malawi. A staggering 90% of Malawians do not have access (mostly those living in rural areas). However, for the remaining 10% – who mostly live in cities – recurring power outages have become a curse. They are supplied by Electricity Supply Corporation of Malawi (Escom), the state-owned power distribution company, which sources the power from Electricity Generation Company, the parastatal generation company. More than 95% of Malawi’s electricity is hydro, coming from the Shire River.

The country has current capacity to generate only 370MW of electricity, a little more than a single Scottish wind farm. A dearth of electricity is one of the reasons Malawi remains so poor. The World Bank calculates that electricity rationing loses it up to 7% of GDP a year, more than any other country in Africa. In comparison, Kenya, Niger, Madagascar and Benin all lose under 2%.

Maleka Thula, chief executive officer at the Economic Association of Malawi (ECAMA) and one of the country’s leading economists, said: “Malawi’s key challenges are structural. The electricity supply problem is tremendous: how can businesspeople plan properly if they do not know whether supply will be consistent?

“The government has done a lot to change the enabling environment so that the private sector can become involved in generation and distribution. However, the state is still way too involved and the economy has been too volatile to encourage vital foreign investment in the energy sector.

“It is true that the economy has now stabilised to a degree, so I think the country’s economic prospects are improving but increasing energy supply is essential if Malawi is to ever fulfil its potential.”

The government believes the energy situation will only get a lot better after 2021, once the Malawi-Mozambique interconnector goes live. It will enable it to import power from other southern African countries. In February, the EU Delegation to Malawi and KfW, the German development bank, agreed to grant €20m to fund the Malawian side of the project.

Many experts say it is surprising that the nation is still so underdeveloped, given that it receives around US$1bn a year in foreign aid. In June, the IMF ranked it as the world’s third poorest country, only surpassed by Burundi and South Sudan. Annual income per head is US$342, compared with US$339 in Burundi and US$246 in South Sudan.

Politically sensitive

Another big impediment to growth has been poor governance. In 2013, a huge financial scandal called ‘cashgate’ shook the country and cost the former president Joyce Banda and her People’s Party the 2014 election. It has also led to huge cynicism among Malawians about the motives of the political class.

At the centre of the scandal was a computer-based financial information storage system. Some government officials had allegedly been exploiting a loophole in the system to divert up to US$250m from government coffers. They are accused of making fraudulent payments to businessmen for services that were never rendered.

The country’s main donors were so infuriated that they withheld US$150m pending an investigation into the scandal (up to 40% of the Malawi government’s annual budget is donor-funded). In the 2017 to 2018 fiscal year, the government tried to win back public confidence by increasing funding for the Anti-Corruption Bureau, the Directorate of Public Prosecutions, the judiciary, and legal aid.

Greg Toulmin, World Bank’s country manager for Malawi, said: “While external shocks have contributed to Malawi’s repeated episodes of macroeconomic instability, weaknesses in economic policies and management have also played a significant role. These have been reflected in failures of fiscal management and expenditure control, and in intermittent implementation of key policies.

“For example, decentralisation – intended to strengthen accountability – has been undermined by partial implementation and competition over control of resources, with negative consequences for basic social services. In the absence of a substantially higher growth rate, rapid population growth and a large youth cohort in Malawi also worsens challenges for poverty reduction, and places more pressure on public services. The quality of education and health services remains of real concern.”

Shortages in human resources, medicines and medical supplies, and inadequate infrastructure affect the health sector. The World Bank says learning outcomes are poor, as well, partly due to significant numbers of untrained teachers in primary and secondary schools. Malawi’s 62% adult literacy rate is slightly lower than the sub-Saharan Africa average of 65%.

Furthermore, gender inequality has a profound impact on a wide array of activities in the country, affecting agricultural productivity, opportunities in the non-farm sector, the demographic transition, and households’ resilience against shocks. Although Malawi saw a reduction in the proportion of the ultra-poor from 24.5% to 20.1% between 2010 and 2016, during the same period the share of the population in moderate poverty has stagnated.

The country has very weak capital markets. Only 13 companies are listed on the Malawi Stock Exchange, which has a total market capitalisation of US$1.9bn. Three Malawi government bonds and one from New Finance Bank, a Malawian banking group, are also listed.

Malawi faces fresh presidential elections next year. Peter Mutharika, aged 79 and the current president representing the ruling Democratic Progressive Party, has said he will stand again. Vice-president Saulos Chilima, aged 45, recently launched a new party, called the United Transformation Movement, and will also be a candidate.

Malawi has managed to stabilise its economy during the past five years but it must work hard to improve the enabling environment for the private sector, so that the country can attract a lot more foreign investment, in particular, to the vital energy sector.