Malawi: Risk Assessment
Country Risk Rating
Business Climate Rating
- Natural resources (tobacco, tea, coffee, sugar, soybeans)
- Rapidly expanding service 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 and geographical isolation
- Increase in extreme poverty (70% of the population in 2020)
- Infrastructure shortcomings (water, energy, transportation, education, health) and weak business environment
- Widespread corruption (123/180 according to Transparency International's Corruption Perceptions Index)
- Diplomatic tensions with Tanzania and Mozambique
Growth to return in 2021 after stagnating in 2020
Although the courts blocked a full lockdown, Malawi introduced various social distancing measures, including closing schools and banning gatherings, which slowed the country's economy in 2020. Even so, the economy held up relatively well thanks to the dominant role played by the agricultural sector, which shrugged off the crisis. Growth will resume in 2021 but is not expected to return to its pre-crisis level.
Agriculture, which employs 60% of the population and accounts for 30% of GDP, did not experience a recession, expanding by 0.5% despite the crisis. This was due, among other things, to the 11% increase in 2020 in maize production, which represents 30% of the agricultural sector. However, agriculture was hurt by lower cotton prices, supply chain disruptions, and the decline in tobacco prices and production, although the United States partially lifted its suspension of tobacco imports from Malawi in August 2020. The absence of a recession in the agricultural sector helped to minimize income losses for rural dwellers, thus stemming the decline in consumption (-5% in 2020). In fact, the drop in consumption was primarily due to the sharp decrease in income for the urban population, which was hurt by the collapse of services (-6% in 2020). Other sectors were severely affected by shortages and recurring power outages but should rebound in 2021 (+2.6% for industry and +2.5% for services). The economy was also damaged by a 7% drop in investment in 2020. Moreover, this decline will not be offset by the 5% increase forecast for 2021, particularly following the flight of foreign investors. However, some investment projects are expected to continue in 2021, such as the World Bank-financed Mozambique-Malawi regional interconnection project, which includes the construction of a high-voltage power line to provide a reliable supply to Malawian businesses and households.
Massie deficits largely financed by international aid
Despite international aid amounting to nearly 3% of GDP, not counting off-budget support for development projects by donors, the public deficit is high. It increased with the launch in April 2020 of a USD 212 million recovery plan, which was subsequently raised to USD 345 million, or 4% of GDP. Financing the deficit will entail increased recourse to debt, especially domestic debt, which covers 85% of the financing requirements. Consequently, public debt also increased, particularly the domestic portion (47% of GDP), which is considered high risk by the IMF. However, the public finances got some support from increased foreign aid, including emergency financing and debt service suspension.
The large trade deficit (21% of GDP before the crisis) was already fuelling a substantial current account deficit, which widened slightly in 2020 but is expected to stabilize in 2021. Despite the decline in the oil bill (10% of imports) and capital goods purchases, the goods deficit widened as a result of increased public sector imports (especially health-related capital goods) and a drop in the country's exports (tobacco, tea, sugar), which were constrained by border closures, rising transit costs and, to a lesser extent, lower demand and prices. The situation should reverse in 2021. Tourism revenues fell, but since they account for only 4% of total exports, they had a mild impact on the services deficit, which remained stable in 2020 and is not expected to change much in 2021. Expatriate remittances, usually equivalent to 8% of GDP, declined moderately. Typically, the current account deficit is largely financed by international aid. The same is true for the additional financing requirements resulting from the crisis, with the IMF providing USD 193 million under two Rapid Credit Facilities, USD 204 million coming from international institutions such as the World Bank, the EU, and the AfDB, plus contributions from development agencies in various countries and an increase in project aid. This should mean that Malawi does not have to drain its foreign exchange reserves, which are equivalent to three months of imports or increase its external debt.
Opposition wins presidential election re-run
After the Constitutional Court canceled the 2019 election, a new presidential election was held in June 2020. Lazarus Chakwera, president of the Malawi Congress Party, previously the country’s sole party, which has a relative majority in parliament (62 seats out of 193), beat the incumbent President Peter Mutharika, taking almost 60% of the votes. The new government will face a tense social climate, aggravated by the COVID-19 crisis and marked by public discontent with recurring weak governance, corruption scandals, endemic poverty, and poor public services.
In terms of external relations, the country strengthened its ties with Israel by becoming, in October 2020, the first African country to open an embassy in Jerusalem in more than 40 years.