LILONGWE, December 8, 2022 - The combined effects of adverse weather, acute foreign exchange shortages, disruptions to zlectricity, and the high rate of inflation, mean Malawi continues to face an economic slowdown, according to the latest World Bank's Malawi Economic Monitor (MEM). It says power cuts are affecting the industrial and service sectors and high inflation the private sector and households.
The 16th Edition of the Malawi Economic Monitor, titled, Planning Beyond the Next Harvest: Advancing Economic Stability and Agricultural Commercialization shows the emerging impacts of the economic crisis where higher government spending continues to widen the fiscal deficit, exerting pressure on the government's fiscal consolidation plans. Malawi's public debt is currently assessed to be in distress, though ongoing debt restructuring negotiations will help ensure debt sustainability over the medium term.
Meanwhile, the impact of the crisis on the private sector is increasingly clear: according to a new World Bank survey of 1,200 small businesses, two-thirds report a decrease in sales compared to a year earlier, a fall driven in particular by an increase in costs for inputs. Three-quarters of businesses consider the unavailability of foreign exchange a threat to their profitability.
The government has taken important steps to counter the effects of the slowdown by stabilizing the economy and improving economic growth. The MEM calls for accelerating these efforts by i) implementing the macroeconomic reforms the government has announced, which include building up foreign reserves, achieving fiscal consolidation, and returning debt to a sustainable path; ii) advancing agricultural commercialization, improving the productivity of firms, and increasing and diversifying exports; iii) protecting the poor and strengthening their resilience by expanding the Social Cash Transfer Program and prioritizing the delivery of social services to the most vulnerable.
"While some of the prospects for Malawi's economy are conditional on an improvement in external conditions, the measures taken by the government to reduce the fiscal and external deficits-including progressing discussions on debt restructuring and the announcement of a less expensive and better targeted Affordable Input Program, AIP-are steps in the right direction and will help address the ongoing crisis," says Hugh Riddell, World Bank Country Manager for Malawi.
The MEM's section on agricultural commercialization says smallholder agricultural production in Malawi is structured in such a way that it cannot sustain the reduction of poverty on a wide scale. To transform the rural economy, it recommends focusing on the potential of smallholder agricultural commercialization. The Economic Monitor highlights the diverse livelihood strategies that are already a reality in rural Malawi, given that the median farming household only derives 21 percent of its annual per capita income from agriculture itself. But it also says the current design of major agricultural support programs, such as the AIP, directly affects the agriculture sector and limits the fiscal space by consuming a significant share of foreign exchange-the impact of which reverberates through the overall economy. Such programs have done little, it says, to stimulate the agricultural transformation process that Malawi urgently needs to generate economic growth and create jobs.
The MEM calls for prioritizing the creation of a vibrant commercial smallholder sector that would give rise to better on- and off-farm livelihood opportunities to spark rural economic growth by strengthening existing agricultural market mechanisms. It recommends improving the business and investment environment and investing in productive infrastructure.
The MEM provides a bi-annual analysis of economic and structural development issues in Malawi.
