Malawi: Risk Assessment
Country Risk Rating
Business Climate Rating
- Natural resources (tobacco, tea, coffee, sugar, soybeans)
- Rapidly expanding services sector
- Resumption of support by financial donors (suspended for some time due to corruption)
- Member of Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (COMESA)
- Economy dominated by agriculture, vulnerable to weather conditions; highly affected by climate change
- Food insecurity, landlocked position
- Increase in extreme poverty (70% of the population in 2020)
- Deficient infrastructure (water, energy, transportation, education, health) and weak business environment
- Widespread corruption (129/180 according to Transparency International's Corruption Perceptions Index)
The agricultural sector drove growth
While not reaching pre-pandemic levels, economic growth will increase in 2022 as agricultural production regains momentum. Although the outlook for agriculture, which accounts for 23% of GDP, will remain subject to the vagaries of the weather, the sector will be supported by subsidies, notably through the Affordable Input Program (AIP), which will boost production, mainly of maize. With 76% of jobs linked to agriculture, this recovery will support household consumption (64% of GDP). However, purchasing power will be constrained by high inflation due to the depreciation of the Malawian kwacha, which is pushing up the import bill. More substantial private consumption would allow the services sector to continue its recovery in 2022. Public investment, mainly focused on infrastructure development (roads, power, and irrigation), will also drive growth. For example, the World Bank-funded Mozambique-Malawi regional interconnection project includes constructing a high-voltage power line to supply businesses and households. The development of the mining sector could attract private investment, such as the Kaniyka niobium project, which would be the first niobium-mining project in Africa. However, these investments will continue to be severely affected by a weak energy supply (70% of the country’s electricity is generated by hydroelectric plants) and the challenging operating environment. Trade’s net contribution to growth will remain negative. The increase in agricultural exports, dominated by tobacco (53% of export earnings), tea, and coffee (10%), will be tempered by rising imports, driven by domestic demand.
Increased risk of debt distress
Despite increased tax revenues linked to accelerating growth, the government deficit is expected to grow in 2022. Expenditures, which were already high, will continue to rise as part of investments under the Malawi III growth and development strategy. In addition to increased spending on infrastructure, agricultural subsidies under the AIP program will weigh heavily on the public deficit. Financing the deficit requires increased recourse to debt, particularly domestic debt, which covers 85% of the financing requirement. Consequently, the public debt continues to grow. The increase in the domestic portion (22% of GDP), which commercial banks mainly hold, is a significant contributor to high-interest rates, which are set to absorb more than 27% of the government’s projected domestic revenues in 2021/22. Moreover, although the majority of debt is still held by multilateral creditors (nearly 60% of external debt), non-concessional loans from regional development banks (notably Afreximbank) also contribute to the increase in debt service. The risk of debt distress is exceptionally high.
The current account deficit, structurally large because of the country’s dependence on fuel imports, capital goods, and fertilizers, is expected to decrease slightly. The trade deficit will narrow only marginally, as the increase in export earnings (tobacco, tea, sugar) linked to the recovery in external demand and strong performances in agricultural production will be partly offset by imports. The services deficit will widen with the upturn in payments for transport services. The primary income deficit, linked to profit repatriation by foreign companies, will continue to weigh on the current account balance. In contrast, expatriate remittances (about 8% of GDP) will drive the current transfer surplus. The country will continue to rely on external development assistance to finance the current account deficit. The authorities may seek a new program with the IMF in 2022. The large current account deficit puts pressure on the Malawian kwacha, which depreciated by more than 6% in 2021, and on the foreign exchange reserves, which represent less than six weeks of imports.
The new government is already facing a tense social climate
After the country’s Constitutional Court annulled the 2019 presidential election because the results had been tampered with, Lazarus Chakwera, leader of the Malawi Congress Party (MCP), won the new presidential election in June 2020, securing 59% of the vote ahead of incumbent president Peter Mutharika, who had been in office since 2014. The MCP holds 59 seats out of 193 in parliament and is expected to continue to lead a minority government with support from the United Transformation Movement (five seats), the People’s Party (also five), and 33 independents. At the same time, the Democratic Progressive Party is now the main opposition party. The new government is already facing a tense social climate, aggravated by the COVID-19 crisis. Endemic poverty, corruption scandals, mismanagement of public funds, and poor public services fuel public discontent. Against this backdrop, protests against the rising cost of living erupted in November 2021, resulting in violent clashes with police. Prices of essential goods and the threat of COVID-19 are expected to remain a significant source of social unrest in 2022.
The authorities are seeking to strengthen ties with China, which already holds half of the country’s bilateral external debt and which is, for instance, financing a coal-fired power plant in Kammwamba, in southern Malawi.