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Malawi - Economy

Malawi has an agro-based economy with the agriculture sector accounting for over 35.5 per cent of GDP, employing about 84.5 percent of labor force and accounting for 82.5 percent of foreign exchange earnings. Agriculture is characterized by a dual structure consisting of commercial estates that grow cash crops and a large smallholder sub-sector that is mainly engaged in mixed subsistence farming. Maize, the staple food, accounts for 80 percent of cultivated land in the small-holder sub-sector. The main agricultural export crop is tobacco, followed by tea, sugar and coffee.

Malawi is a landlocked, densely populated country. Its economy is heavily dependent on agriculture, with tobacco, tea, and sugar as 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 31% of 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 approximately 64% to the 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 improved basic infrastructure.

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 canceled, enabling the government to increase expenditures for development.

Economic growth had been brisk, with real GDP rising by 7.6% in 2009 and 7.1% in 2010. Real GDP growth for 2011 was 4.6% (CIA World Factbook). The Economist Intelligence Unit (EIU) continues to downgrade forecasts of real GDP growth, from 5.3% for 2011 to 4.3% for 2012. Inflation has been largely under control since 2003, averaging 10% in that year and 7.4% in 2010. Discount and commercial lending rates have 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. In December 2010 the Kwacha had depreciated to 150.8 to the U.S. dollar. In August 2011 the Kwacha depreciated to 165 to the U.S. dollar. The government is expected to allow further controlled depreciation in 2012. Fiscal management under the Mutharika administration kept the macroeconomic environment relatively stable over the past 5 years. However, the lack of a competitive real exchange rate and resulting imbalances recently have caused a pronounced and chronic foreign exchange shortfall, leading to supply shortages of most imported goods (fuel, construction materials, and other raw materials not available in Malawi). 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.

The state of Malawi’s transport infrastructure is characterized by poor road network, poor and limited access to ports, limited air links, inadequate freight and rail capacity. The inadequacy of the transportation infrastructure results in high costs of production, where transportation represents 55 percent of costs, compared to 17 percent in other developing countries. Efforts will be on improving mobility and accessibility of the population to key road corridors within Malawi and out of Malawi while facilitating the improved mobility and accessibility of rural communities to goods and services at low cost. Effort will also be made to improve inland shipping network that is active in local and international shipping, trade and tourism in a safe manner while protecting the environment. Plans are underway to navigate the Shire River so that the country could have direct access by water to the ports along the Indian Ocean through the Shire-Zambezi Waterway.

The provision of energy in Malawi is inadequate, unreliable and inaccessible to all who need it largely on account of lack of competition in the sector, non-functioning power plants and inability to generate sufficient amounts of energy. The goal is to reduce the number and duration of blackouts, increase access to reliable, affordable electricity in rural areas and other targeted areas, improve coordination and the balance between the needs for energy and those of other high growth sectors such as tourism and mining.