Malawi Economic Monitor: Reforming with Urgency – Malawi’s Path to Economic Stability and Investing in Adaptive Safety Nets

LILONGWE, July 25, 2024 - A drought and an incomplete reform agenda undermine prospects for a rapid economic recovery in Malawi. Economic growth in Malawi fell short of expectations in 2023 and is projected to remain subdued in 2024. While implementation of planned macroeconomic and structural reforms is expected to boost GDP growth over the medium term, an El Niño-induced drought has worsened the near-term growth outlook. The drought has compounded longstanding macroeconomic imbalances, with large fiscal deficits, balance-of-payments challenges, unsustainable debt, and price instability weighing on economic activity since 2020. As a result, the growth projection for 2024 has been revised downward to 2%. This is according to the recently launched Malawi Economic Monitor, 19^th Edition titled "Reforming with Urgency - Malawi's Path to Economic Stability" with a special topic, Investing in Adaptive Safety Nets.

A weak harvest has intensified food insecurity. The production of staple foods has fallen behind national needs, preventing a large share of households from accessing sufficient nutrition. Many households are expected to enter the 2024/25 lean season with limited food stocks, depleted finances, and precarious health conditions. Given the grain deficit in the country, limited food stocks in the region, and little recent progress in expanding irrigated maize production, increased grain imports are urgently needed.

A sustained recovery requires urgently implementing planned reforms. Addressing Malawi's difficult economic situation requires a combination of immediate emergency-response efforts and the implementation of structural reforms. The coming months will be critical to ensure that planned macroeconomic reforms are implemented and that the external and fiscal adjustment process remains on track. At the end of 2023, the government reached an agreement with the IMF on a four-year program under the Extended Credit Facility (ECF). This achievement has bolstered confidence in the reform process, but success is far from assured. Rebalancing the economy and enabling faster, more inclusive growth, while strengthening resilience against shocks will require accelerating reform efforts.

The 19th edition of the Malawi Economic Monitor outlines urgent policy measures required to stabilize the economy, protect vulnerable households, and enhance long-term growth. The focus should be on:

i) Restoring macroeconomic stability: Planned macro-fiscal reforms must be implemented and sustained to achieve fiscal consolidation, ensure the success of external debt restructuring, and contain the growth of domestic borrowing.

ii) Bolstering food security, building resilience, and protecting the poor: Given the food deficit in the upcoming lean season, it will be essential to import maize to alleviate food insecurity while also advancing policy measures to build resilience. The existing social protection infrastructure must be effectively leveraged to provide targeted and adaptable support to poor and vulnerable households.

iii) Strengthening productive capacity and diversifying exports: With climate-induced natural disasters and extreme weather events likely to intensify, promoting sustainable farming practices and investing in irrigation systems will be essential to build resilience and ensure adequate food security.

The report's Special Topic highlights improvements in the performance of Malawi's social protection system, including cutting-edge innovations in climate adaptation and household-level support. Malawi is exceptionally vulnerable to climate change and other shocks. A lack of savings and other coping mechanisms increases the burden such that for every three Malawians who escaped poverty between 2010 and 2019, four others fell into poverty due to weather-related shocks. As climate risks continue to intensify, Malawi will increasingly face multiple successive and overlapping shocks. The social protection system is therefore the country's main policy framework for building long-term resilience to climate and weather-related shocks at the household level.

Greater investment in social protection, building on the strong foundations laid over the last two decades, will enable Malawi to respond swiftly and effectively to a more volatile environment. In recent years, investments in improving the social protection system have highlighted its capacity to protect a larger share of households more effectively against a broader range of shocks. Despite these achievements, institutional fragmentation remains a challenge, as the social protection sector remains divided among several different line ministries tasked with various aspects of program implementation, which complicates coordination. The policy framework is also incomplete. Further reforms to the sector should emphasize sustainable financing and prioritize the progressive expansion of coverage and benefit levels.