Malawi: Risk Assessment
Country Risk Rating
Business Climate Rating
- Natural resources (uranium, tea, coffee, tobacco)
- Rapidly expanding services sector
- Resumption of support by financial donors
- Member of the SADC (Southern African Development Community) and the COMESA (Common Market for Eastern and Southern Africa)
- Economy dominated by agriculture, vulnerable to weather conditions
- Food insecurity
- High inflation
- Infrastructure shortcomings (water, energy)
- Low foreign exchange reserves
- Increase in extreme poverty
- Diplomatic tensions with Tanzania and Mozambique
Growth Fueled by Agriculture
After two years marked by weather shocks and food shortages, growth has been stronger in 2017, thanks to increased agricultural production. Representing almost 30% of GDP, agriculture, if spared any further weather shocks, will still be the main engine of growth in 2018. Specifically, production of maize, tobacco, tea, and sugar are expected to rise. With almost 65% of jobs in the sector, household consumption, boosted by higher revenues, is likely to benefit. Moreover, with household income eroded by inflation, inflationary pressures are expected to decline. As a result, trade activities, dynamic in 2017, are expected to continue to remain firm. More generally, the tertiary sector will benefit from the recovery in agricultural activity, as will demand for transport services which, for example, is expected to climb.
The government’s efforts to restore investor confidence, shaken in 2013 by the misappropriation of public funds (the Cashgate scandal), could help stimulate growth through private investment. Like trade, private investment could also benefit from the double taxation treaty signed between Malawi and Zambia in 2017. Despite the need for fiscal adjustment, development spending is likely to be maintained and will sustain activity. Chiefly intended for infrastructure, this investment will support the energy and construction sectors. The start of the first development phase of the Kamwamba coal-fired power plant in 2018, will also contribute to the vitality of these sectors. Nonetheless, despite favorable prospects, growth, especially with regard to industry, will continue to be hampered by the lack of access to credit and an inadequate water and electricity supply.
Despite the downward pressures weighing on the Malawian kwacha, the disinflation process, begun in 2017, is likely to continue in 2018, thanks to the mitigation of rising food prices.
Improvement in the Twin Deficits
The fiscal deficit, at a worrying level following the Cashgate scandal and successive budget slippages, started to improve in 2016/2017. As in the previous tax year, the government’s efforts to reduce the deficit will continue during the 2017/2018 financial year. More positive growth is expected to boost the collection of government revenues. Despite the fall in aid and dedicated donations, the reform of VAT and abolition of certain tax exemptions, adopted during the previous financial year in order to widen the tax base, will support the upward trend. The tax adjustment will apply mainly to current spending, which is expected to decline in real terms and as a percentage of GDP. Development spending, particularly on agriculture, is expected to be spared in order to sustain growth. The return of international donors, including USD 80 million of funding from the World Bank, will help to finance capital investment projects and to clear payment arrears without worsening the deficit.
After peaking in 2016 following a need for maize imports in order to contain the food crisis, the current account deficit is expected to continue on a downward trend in 2018. Higher agricultural output, which is the main source of export income, should help contain the structural trade deficit, which remains the main negative contributor to the current account deficit. The balance of transfers will continue to provide the main positive contribution. The gradual reduction in the current account deficit should help ease the pressure on the foreign exchange reserves, equivalent to three months of imports, and on the Malawian kwacha.
Despite a modest risk of over-indebtedness, Malawi’s debt remains vulnerable to external shocks.
The 2019 Elections Cast a Shadow Over the Country
Elected in 2014, President Peter Mutharika is preparing to stand as his own successor in the 2019 elections. Nevertheless, while there is still strong defiance towards institutions, corruption scandals continue to impede the effectiveness of Malawian governance. In February 2017, a new scandal forced Peter Mutharika to sack his Minister of Agriculture, George Chaponda, who he had considered a close ally. Dubbed “Maizegate” by the media, and an echo of “Cashgate”, which cost Malawi the support of its financial backers between 2013 and 2016, this scandal has isolated the president within the Progressive Democratic Party (PDP), and has at the same time eroded its political capital with a population unhappy with recurrent governance deficiencies, repeated corruption scandals, endemic poverty and inadequate public services. Because it is disorganized, the opposition seems unable to capitalize on this social frustration, despite the weakness of the government coalition with the United Democratic Front (UDF). In addition, more vigorous growth, weaker inflationary pressures, the resumption of talks with donors and relative legislative stability could work in favor of the PDP and the UDF.
At the heart of the tensions with Tanzania which have existed for over 50 years, the division of the Nyasa/Malawi Lake has become an even more sensitive issue since 2011, when Malawi handed out oil and gas exploration licenses. Illegal fishing in Lake Chuita by Mozambican armed groups is poisoning relations with Mozambique.
The business climate remains poor despite the progress made.