Malawi: Economy

Malawi is a landlocked, densely populated country. Its economy is heavily dependent on agriculture, with tobacco, tea, and sugar its most important export crops. Traditionally, Malawi has been self-sufficient in its staple food, maize (corn), and during the 1980s exported substantial quantities to its drought-stricken neighbors. Agriculture represents 36% of the GDP and represents about 80% of all exports. Nearly 90% of the population engages in subsistence farming. Smallholder farmers produce a variety of crops, including maize, beans, rice, cassava, tobacco, and groundnuts (peanuts). The agricultural sector contributes about 63.7% of total income for the rural population, 65% of manufacturing sector's raw materials, and approximately 87% of total employment. Financial wealth is generally concentrated in the hands of a small elite. Malawi's manufacturing industries are situated around the city of Blantyre. Recent years have seen increased activity in Malawi’s historically undeveloped minerals sector. A major uranium mine that opened in 2009 in the north of the country is contributing significantly to export earnings and overall GDP. A full bankable feasibility study began in late 2009 on what is projected to be a similarly significant niobium deposit in central Malawi.

Malawi's economic reliance on the export of agricultural commodities leaves it vulnerable to external shocks such as declining terms of trade and drought. Labor costs are low, but high transport costs, which can amount to 50% of the price of imports and exports, constitute an impediment to economic development and trade. A shortage of skilled labor; bureaucratic red tape; corruption; and inadequate and deteriorating transportation, electricity, water, and telecommunications infrastructure further hinder economic development in Malawi. However, recent government initiatives targeting improvements in the road infrastructure, together with private sector participation in telecommunications, have begun to render the investment environment more attractive. A Millennium Challenge Corporation (MCC) Compact approved in January 2011 promises to significantly improve access to power; electricity sector negotiations also have been underway with the World Bank.

Malawi has undertaken economic structural adjustment programs supported by the World Bank, the International Monetary Fund (IMF), and other donors since 1981. Broad reform objectives include stimulation of private sector activity and participation through the elimination of price controls and industrial licensing, liberalization of trade and foreign exchange, rationalization of taxes, privatization of state-owned enterprises, and civil service reform.

In August 2005 the IMF approved a Poverty Reduction and Growth Facility (PRGF) for Malawi. In August 2006 Malawi successfully reached the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative, resulting in debt relief from multilateral and Paris Club creditors. Over $2 billion in debt has since been cancelled, enabling the government to increase expenditures for development. Real GDP increased by 7.6% in 2009. Inflation has been largely under control since 2003, averaging 10% in that year and 8.4% in 2009. Discount and commercial lending rates have also declined from 40%-45% in 2003 to 25.3% currently. After holding the Kwacha’s rate against the dollar fixed for 5 years, since late 2009 the government has allowed some adjustment to the exchange rate. As of December 2010 the Kwacha had depreciated to 150.8 to the U.S. dollar. The government is expected to allow further controlled depreciation in 2011. The Kwacha is still generally considered to be overvalued and with imports still heavily outweighing exports, the country continues to suffer from a severe shortage of foreign exchange.

Malawi has bilateral trade agreements with its two major trading partners, South Africa and Zimbabwe, both of which allow duty-free entry of Malawian products into their countries. Malawi is a member of two regional trade organizations, the Common Market for Eastern and Southern Africa (COMESA), and the Southern African Development Community (SADC).

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