THE ECONOMY OF MALAWI
5.2 MALAWI'S MACROECONOMIC PERFORMANCE .1 Growth Rates and Inflation
The overall economic performance of the Malawian economy during the period 1990- 2002 has been mixed due to external shocks and poor domestic policy management. After improving from an average rate of 1.9% in 1980-89 to 4.1 % in 1990-99, real GDP growth contracted by 4.1 % in 2001. Provisional estimates from the National Statistics Office (NSO) for 2002, suggest that the economy may have been stagnant in 2002, but even this would lead to a contraction in GDP per capita of approximately 2.2%. The high real interest rates, which have made borrowing prohibitively expensive, have been the most significant factor in the slowdown in business activity, compounded in 2002 by the maize shortages, which affected real disposable incomes.
Table 5.1: National Income and Prices Annual Percentage Changes (1980·2002)
Source: MInistry of Finance and Reserve Bank of Mala WI
*
Rate of natural increase was 2.4% for 2000-20021980-1989 1990-1999 2000 2001 2002*
% % % % %
Real GDP 1.9 4.1 0.8 -4.1 0.1
Real per capita GDP -1.8 0.8 -1.6 -6.3 -2.2
Period average consumer price 17.0 30.5 29.6 27.2 14.7
index ..
The rate of inflation as measured by the consumer price index, accelerated from an average 30.5% in 1990-99, and peaked at 56.6% in March 1999. Since then, inflation has been brought down to a year on year rate of under 11 % in January 2003, which suggests that single figure inflation is achievable in the near future.
5.2.2 Government Revenues, Expenditures and Budget Deficits
Government revenues and expenditures have fallen as a proportion of GDP according to the Ministry of Finance and the Reserve Bank of Malawi. The fall in revenues as a percentage of GDP seems unlikely given the increase in revenue collection reported in
2002. The figures are therefore subject to revision. The budget deficit (including grants) as a ratio of GDP, worsened to 7.4% in 2001 from an average of 6.2% in 1990-99.
Table 5.2: Central Government Revenue, Expenditure & Deficit as a Proportion of GDP
Source:MInIstry of FInance and Reserve Bank of MalaWI
*Provisional estimate
1980-89 1990-99 2000 2001 2002*
% % % % %
Revenue 20.6 17.2 18.7 14.9 14.6
Total expenditure 32.5 28.5 32.8 28.5 23.1
Current expenditure 22.0 21.4 22.6 21.3 19.4
Capital expenditure 9.7 7.1 10.3 7.2 3.7
Overall deficit excluding grants -9.6 -11.3 -14.1 -13.5 -8.5
Overall deficit including grants -6.3 -6.2 -2.0 -7.4 -3.1
..
The cost of the maize shortage has been high at an estimated K7.2 billion since mid- 2002, but the continued shortfall in budgetary support due to the lack of an agreement being reached with the IMF, has resulted in a massive and unsustainable increase in domestic debt to finance government expenditure. The domestic debt has doubled to K45 billion as at February 2003, up from K21 billion at the end of 2001.
Table 5.3: Outstanding Domestic Debt (2000-2003), (K millions)
At 31 Dec 2000 At 31 Dec 2001 At 31 Dec 2002 At 19 Feb 2003 K(millions) K(millions) K(millions) K(millions)
Treasury bills 9,173 5,216 28,933 28,674
Other forms 3,193 16,539 13,470 16,496
Total 12,366 21,755 42,403 45,170
Source:Reserve Bank of MalaWI
The cost of servicing domestic debt has risen sharply both as a proportion of government revenue and as a proportion of GDP. By the end of 2002, servicing domestic debt accounted for 24.7% of government revenues and 4.5 % of GDP.
Table 5.4: Cost of Servicing Domestic Debt as % of Government Revenues and GDP
As % of: 1998 1999 2000 2001 2002
% % % % %
Govt. revenue 13.2 10.7 16.0 21.5 24.7
GDP 2.1 1.9 2.7 3.9 4.5
Source:Reserve Bank of MalawI
The trend is still upward and unsustainable, even as government revenue collections have improved dramatically over the last year. Urgent action is now required to narrow the deficit through significant cuts in government expenditure. In addition to domestic debt, external debt as a proportion of GDP has increased from 110.2% over the period 1990- 1999 to 191.4% in 2001, reflecting a high and increasing dependency on external financing.
Table 5.5: Domestic Debt& Current Account Deficit as a % of GDP
Source:Mtnlstry of Ftnance and Reserve Bank of MalaWI
1980-89 1990-99 2000 2001 2002
External debt stock0/0 4.4 110.2 197.6 191.4 N/A
..
5.2.3 Interest Rates
In a liberalized financial system, an increase in government domestic debt leads to an increase in interest rates. This is precipitated by the government's demand of scarce domestic financial resources from the private sector - demand of these resources exerts upward pressure on interest rates. Available data on Malawi supports this cause and effect relationship. As government domestic debt rose, real Treasury Bills yields also increased from an average of -0.76% in 1994 to 25.9% in 2002.
The level of interest rates is also a reflection of the stance of the monetary policy - the higher the bank rate, the tighter the monetary policy stance, and vice versa. In Malawi, the bank rate has remained above 40% for the past three years, as a result of the adoption of a tight monetary policy by the Reserve Bank aimed at reducing inflation to single digit
levels. Reserve Bank lending to the government increased from Kl.6 billion at the end of 2000 to K15.7 billion at the end of 2002.
The tight monetary policy stance has helped somewhat in slowing down the depreciation of the Malawi Kwacha, but at a high cost to business and investment. The Malawi Kwacha depreciated by 16.4% from June 2002 to January 2003, against a fall in foreign reserves of 37.0% over the same period. The sharp decrease in foreign reserves, coupled with the inability of the government to resume its Th1F Programme, has had drastic results for both the public and private sectors.
Table 5.6: Private Sector Credit as a %of GDP (1980-2002)
Source:Reserve Bank of MalaWI and MinIstry of Finance
1980-89 1990-99 2000 2001 2002
Credit to the private 5.2 11.3 14.5 1.5 N/A
sector
..
5.2.4 Balance of Payments
The current account deficit as a proportion of GDP has steadily increased over the past few years, reaching an unsustainable level of 10.9% in 2001.
Table 5.7: Current Account Deficit as a %of GDP
Source.MinIstry of Finance and Reserve Bank of MalawI
1980-89 1990-99 2000 2001
Trade Balance 4.0 -4.2 -3.5 -3.3
Current Account Deficit -0.7 -2.2 -5.9 -10.9
(including official transfers)
Real effective exchange rate K:$ 63.0 77.4 88.4 84.1
Terms of trade index 189.8 138.2 130.1 107.5
..
Malawi continues to be heavily dependent on foreign aid and therefore, greatly susceptible to the flow of donor funds. The current account is also affected by changes in the terms of trade and exchange rate movements. The high dependence of the Malawian
economy on tobacco, tea, sugar, and other agricultural commodity exports, also makes it vulnerable to fluctuations in world supply, demand, and prices.
In 1994, the exchange rate regIme was liberalized. However, this was immediately followed by the administrative fixing of the nominal rate from 1995 to mid-1998, which resulted in an appreciation in the real exchange rate. As a result, a massive 62%
depreciation was experienced in August 1998 when the nominal rate was suddenly loosened. The post-1998 fiscal crises has contributed to a highly volatile business environment not just in terms of borrowing costs, but also the effects on the real exchange rate and feedback effects on inflation.
The Kwacha has continued to depreciate against the US dollar by 37.4% in 2000 and 21.3% in 2001 (World BankIIMF figures). There was a period of appreciation of the currency in mid 2001 and into early 2002, but this was reversed and the depreciation continued. The instability of the Kwacha has had serious repercussions for all businesses operating in Malawi. The appreciation was particularly damaging to some exporters depending on the timing of their inputs and exports, for example, those in the tea industry.
Table 5.8: Depreciation of the Kwacha & Trade Dependence
1980-89 1990-94 1995-99 2000 2001
Nominal depreciation (K:$) -11.2 -18.6 -168.2 -34.7 -21.3
Exports plus imports (% of 54.6 62.0 64.0 75.0 45.2
GDP)
Source. World BankIIMF
S.2.S Investment and Savings
Gross investment expenditure as a percentage of GDP declined from an average level of 18.4% in 1980-89, to 16.8% in 1990-99 and 10.9% in 2002. Public investment which accounts for the larger share of total investment, dropped from 14.9% to 9.9% of GDP between 1990-99; whilst private investment declined to a minimal 2.0% of GDP over the same period of time.
Table 5.9: Savings& Investment as a % of GDP (1980-2002)
Source:MInistry of Fmance and Reserve Bank of MalawI
1980-89 1990-99 2000 2001 2002
Domestic Savings 18.4 16.8 13.6 13.7 1.3
National Savings 8.7 8.2 8.8 ILl 4.2
Gross Investment 18.4 16.8 13.6 13.7 10.9
..
The major factors contributing to the slowdown in investment included general economic deterioration, high interest rates, and low domestic savings.
Domestic savings have dropped from 13.7% of GDP in 2000 to 1.3% in 2002, reflecting the major slowdown in economic activity and inflation. Similarly, national and foreign savings declined over the same period, due to both low economic activity and negligible foreign assistance. National savings fell from 11.1 % of GDP in 2001 to 4.2% in 2002, whilst foreign savings plunged from 15.8% in 1994 to 6.7% in 2002.