Malawi’s One Year of Bumpy Road to Economic Recovery

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The second coming of Democratic Progressive Party (DPP), under the newly elected state president professor Peter Mutharika, gave some new hope to many Malawians.  Among others, many Malawians hoped that the captaincy of Peter Mutharika, the younger brother to the late Bingu wa mutharika would work wonders to resuscitate the ailing economy the way it did in the first years of its previous rule between 2004 to 2011 when the country was billed the second fastest growing economy second to the oil-rich Qatar.

A closer scrutiny to its one year road to economic recovery, it is clear  that the DPP led government   have made some strides while in some cases, there is little doubt that the  administration still has a lot on its plate to resuscitate the ailing economy.

Economic  and finance think tanks have righted the overview of the one year of Malawi’s economic performance, citing the double digit inflation rate, skyrocketing interest rates , a weaker local currency, as well as uncertainties in  support of the donor community , as major contributors to the negative economic growth the country is experiencing.

The other most critical issue facing the country has been management of market reforms. Market reforms have resulted in the high cost of borrowing and investment, many inefficient companies have been forced to the wall, while new businesses have found it difficult to enter the market. This coupled with high consumer prices and lower real wages has also evoked sympathy for a new political force in the movement.

As a donor driven country for over 50 years now, the new government is beset in its development activities following the aid suspension late September 2013 in the wake of the debilitating ‘cash gate’ scandal and subsequent withholding of US$ 150 million in donor aid left by former  government . The multi-million Kwacha cash gate scandal, implicating those close to the former president, is still pending in court. It involved senior government and banking figures siphoned billions of Malawi kwacha’s in bogus contracts and supplier enterprise.

Meanwhile, Malawians are still servicing the debt left behind by the scam.  They are feeling the negative effects through inflation of goods and services, now over 18.6 percent.

The new government is however, faced with the uphill task of convincing the donor community, especially the World Bank on its commitment to stick to fiscal discipline and return to already agreed programmes, especially on poverty reduction strategies. The country’s economic survival depends on its support.

Until recently, only two donors-AFDB and IMF have so far answered the call for aid. It is obvious that there are other grey areas that may be making donors to engage in wait-and see game. For example, the delaying of prosecution of cash gate suspects and the K92 billion Kwacha financial audit from the then DPP regime are some of them.

However, the government has again been forced to resort to domestic borrowing because donors do not produce timely assistance to the country. As a result, the much needed balance of payment support has been elusive. This has contributed to, a larger extent, an unstable exchange regime. The most affected sector has been the private sector which requires capital for imports of raw materials,

In Malawi, when government fails to raise enough revenue from taxes and fees, it resorts to borrowing from the local banks and service providers. Increased levels of local borrowing would put pressure on the already high interest rates that have effectively stifled the country.

Heavy government borrowing from the domestic market means that few resources are left for productive by the private sector. The private sector is therefore crowded out of the domestic money market. The competition posed by the government in the domestic market push the demand for credit up. As a result interest rates shoot up. This lead to high cost of borrowing. The private sector, which is considered the engine of the economic growth shrink considerably. The by-product of all this is massive unemployment and high commodity prices.

Accountability and transparency in the public management of public resources will be the key again in unlocking donor support, which has been missing for the past three years. But in Malawi, official estimates, provided by the office of director of public prosecutions, reveal that in recent years, one third of the public finances were wasted through corruption and fraud. Corruption erodes investors’ confidence so that no meaningful investment can take place where the practice has become widespread.

The problem is that the economy losses as resources that could have benefited get diverted to bank accounts elsewhere. But Mutharika’s administration promises a new outlook to economic management. As can be seen in his inaugural speech, he promised fiscal discipline, zero tolerance on corruption, fraud, theft, bribery of public resources and micro-economic stability.

He said his government has put in place a public finance management plan to contain the theft and mismanagement of public funds. The nation has witnessed visible sign of his government commitment to flush out corruption. Since the appointment of a new Director of public prosecutions and a Director of the anti-corruption {ACB} several high profile corruption cases have come to light sending a clear message to investors and donors.

Compounded by the loss of budget support from donors, Malawi’s budget position has been under pressure with the country expected to run a deficit of 5.9 percent fiscal year. In recent years, the country’s fiscal deficit as a percentage of GDP has been hovering around 1.5 percent.

In his public address, Mutharika said his government is committed to reducing the deficit to levels below three percent of the GDP to reduce pressure on domestic borrowing and interest rates. Currently, domestic borrowing stands at 4.1 percent of recurrent transactions which is largely financed by domestically generated resources, but Mutharika projects a modest net borrowing of about 1.1 percent of the GDP.

Persistent budget deficits were aggravated by heavy spending. This coupled with the high cost of maintaining parastatals, led to budgetary deficits and distotations in money markets and investment. What particularly worries economists is the government’s decision to press ahead with a range of expensive projects such as FISP that could derail attempts to control the budget deficit.

In the year, Malawi  has recorded 38 percent growth in external borrowing, domestic debt-which is more expensive to services than foreign debt continued to pile up to over K500 billion and stock of arrears stands around K150 billion, according to reserve of Malawi figures.

In 2014, the economy grew by 5.7 percent, a rate which the World Bank senior country economist for Malawi Richard Record described as stable. But now the bank projects that the domestic economy would slow down to 5.1 percent due to adverse weather, which is likely to affect agricultural production.

A slowdown in economic growth is also linked to declining investment in productive sectors, private investment fell of GDP due to fears over the government’s high budget deficits, and the high cost of doing business in Malawi’s highly regulated economic environment.

However, in his state of the nation Address, president Muntharika said the economy is projected to register a real GDP growth of 5.4 percent in 2015, despite setbacks such as recent floods and dry spells that have affected agricultural production.

The danger of recording lower growth rates, as seems the case at the moment, will not make any dent on the levels of poverty in the country. The UNDP believes that any growth that is below six percent annually will have no impact on poverty reduction.

However, despite the economic uncertainties in the first year of the new leadership, Mutharika has worked his magic and surprised his pundits when he creatively secured debt swap facility with the PTA Bank which helped boosts foreign exchange reserves and led to the appreciation of the Malawi Kwacha at a time the country was going through the lean period of the economy when exports slow down and agriculture inputs imports rise. The appreciation of the Kwacha combined with a reduction of pump prices of fuel in the country which, for example, saw a fall in the price of petrol from over K850 to about K696 per litre. The development eased down inflationary pressures.

Actually, the rate of inflation since then has been on a downward trend, failing from 24 percent at a time Mutharika became president last May to 18.2 percent currently. According to recent release from the national statistical office (NSO), Malawi’s rate of inflation eased by 1.5 percentage points in March 2015 to 18.2 percent as food prices softened.

However, although inflation has been failing, it still remains high. In fact, Malawi’s inflation remains the highest in the region. It is rated second highest in the COMESA region and fourth highest in the world. As a result lending rates have remained too high and this probably the biggest challenge facing the economy.

Malawi’s inflation is mainly driven by the cost of food, particularly maize, which accounts for 58.1 percent of the consumer price index (CPI)- a measure that examines the weighted average of prices of a basket of consumer goods and services. In the CPI, housing contributes 12.1 percent, clothing and footwear 8.5 percent, beverages and tobacco 5.9 percent, transportation 5.1 percent, housing operation 4.1 percent and others 6.2 percent. However, the heavy rains and floods that hit the country followed by dry spells later have resulted into reduced food production, creating fresh concerns about inflation as maize prices are expected to increase sharply on the market.

And, reports indicate that Government may resort to maize imports which will certainly put pressure on our foreign exchange and consequently weaken the kwacha.

The APM administration has also nevertheless fulfilled some of his campaign promises such as reducing the size of the cabinet to 20 from over 30 by the previous government. He also sharply scaled down on international and local travels, size of government delegation going abroad, and number of cabinet ministers attending public events both domestic and international, reviewing allowances for the public servants and rolled out the public sector reform programme as some of his austerity measures.

But one of the biggest challenges facing the country is meeting public expectations. Malawians expect nothing less than an improvement in their lives through poverty reduction strategies. The gains to be made at the national levels, in form of lower interest rates, inflation and macroeconomic stability needs to trickle down to the poor masses.

As they say, any economic improvements are meaningless unless they are felt in the ordinary man’s pockets.

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