Malawi: Risk Assessment
Country Rating1
Rating: D
Business Climate Rating1
Rating: D
Risk Assessment2
The economic diversification process continues but the vulnerability to inclement weather persists
Economic growth slowed markedly 2010 due to a shortage of rain that undermined the farm sector (35% of GDP) and to delays in the start-up of new mining sites. In 2011, GDP growth is expected to be driven by the rebound in agriculture which has become more productive thanks to the increasing use of subsidized seeds. But the sector will remain hampered by its limited access to irrigation systems. Outside of agriculture, the rest of the economy is also expected to grow driven by the acceleration of production of the Kayelekera uranium mine (in operation since 2009) and the increase in public spending on essential infrastructure, transportation, and the food sector. But the erratic supply of electric power will continue to impede development of the manufacturing sector, which continues to focus on processing food product exports (tobacco, sugar cane, cotton, tea, corn).
A weak financial position
In 2010, the fiscal deficit narrowed substantially thanks to an improvement in tax collection and an increase in grants. In 2011, public spending will continue to be largely covered by international aid. Fiscal revenues are expected to continue to rise thanks to the on-going reform of the tax system. The proportion of spending devoted to the payment of wages is expected to increase significantly as a result of the hiring of skilled personnel in the education and health sectors. As a result of the debt relief granted to Malawi under the HIPC and MDRI late 2008, (public) foreign debt will likely remain sustainable in the near-term. After the $32-million Exogenous Shocks Facility granted in 2008, Malawi became, in February 2010, the first country to benefit from the IMF's new Extended Credit Facility, an $80 million credit line intended to support implementation of structural reform and reduction of foreign debt. International aid will be all the more necessary with FDI in the tobacco sector (50% of export revenues) likely to continue to decline due to the tightening of government policy towards foreign investors. Exchange rate risk has been high. The foreign exchange deriving from export revenues (tobacco, uranium), transfers from emigrant workers, and emerging tourist sector (Lac Malawi) will prove to be insufficient to enable the country to avoid a devaluation of the Malawian kwacha. The Central Bank has thus engaged in a process under IMF auspices to liberalize the exchange-rate system, which could be completed this year, thereby enabling gradual replenishment of foreign exchange reserves.
Relative political stability has facilitated going forward with structural reforms
President Bingu Wa Mutharika, age 75, was reelected to a second term by an overwhelming majority in the May 2009 elections considered free by most international observers. His Democratic progressive party DPP also won a large victory in Parliament, which has facilitated implementation of far-reaching economic-policy and governance reforms, on hold until then. In 2011, the government is expected to continue to invest in economic diversification. Government measures notwithstanding, however, food crisis risk has remained substantial in a country where one third of the population suffered from the famines in 2000 and 2005.
Strengths
- Support of international institutions and financial backers
- Increasing productivity of the farm sector
- Uranium exploitation initiating a process of economic diversification
- Strong growth in the farming sector
- Investment in rail transport infrastructure
Weaknesses
- Landlocked geographic position
- Mainly agricultural economy vulnerable to inclement weather
- Mining sector underexploited (coal, bauxite)
- Persistent food insecurity with 40% of the population living below the poverty line
- Deficiency of water and electricity infrastructure