Malawi Economic Monitor Calls for Urgent and Sustained Reforms for Faster and More Inclusive Growth

LILONGWE, July 25, 2024 - Malawi's current economic difficulties require a combination of immediate response measures and urgent reforms to address longstanding macroeconomic imbalances including persistent and large fiscal deficits, balance-of-payments challenges, unsustainable debt, and price instability, which have weighed on the country's economy in recent years, according to the latest World Bank Malawi Economic Monitor (MEM).

The MEM provides a semi-annual analysis of Malawi's economic and structural development issues, and this 19th edition, entitled The Urgency of Reforms: Malawi's Path to Economic Stability reveals that Malawi is set to have the weakest macroeconomic fundamentals among its neighbors, with minimal improvement in living standards in recent years. The World Bank's economic growth projection for 2024 has been revised downwards to 2.0 percent, which is lower than the 2.6 percent population growth. GDP growth, therefore, is expected to decline in per capita terms. Moreover, the El Niño-induced drought in January and February worsened the near-term growth outlook.Given the grain deficit in the country, shortage of food stocks within the region, and little recent progress in expanding irrigated maize production, increased grain imports are urgently needed.

The coming months will be critical for Malawi to ensure that planned macroeconomic reforms are implemented and fiscal adjustment measures remain on track. Fiscal consolidation and debt restructuring remain vital for the country's efforts to restoring fiscal and external sustainability - as it remains on a path towards having one of the highest fiscal deficits relative to GDP across all Sub-Saharan African countries this year. As domestic debt stock continues to rise, interest payments have become the largest single expenditure item in the national budget, consuming 32 percent of revenue or 6.7 percent of GDP, crowding out productive investment and social spending.

"The Government of Malawi started implementing important fiscal and public financial management reforms, including the agreement on a four-year Extended Credit Facility (ECF)-supported program at the end of 2023 which was a significant milestone. These efforts, however, represent the start of a reform process, not its conclusion. A sustained reform and modernizing agenda is required to rebalance the economy towards faster, more inclusive, and more resilient growth. Policymakers also need to focus on increasing investment in priority sectors, of agriculture, energy, mining, and tourism," says Firas Raad, World Bank Country Manager for Malawi.

This MEM's Special Topic, "Malawi's Social Protection System Adapts to Mounting Risks", highlights the vulnerability of the country to climate change and other shocks, including extreme weather events such as cyclones, floods, and droughts, which have had immense negative social and economic impacts. The lack of savings and other coping mechanisms among the poor and vulnerable has increased the burden of these shocks so that for every three Malawians who escaped poverty between 2010 and 2019, four more fell into poverty due to weather-related shocks. Malawi's shock responsive social protection system, however, has played a key role in shielding households from the different crises and extreme weather events, but further efforts are needed to meet the challenges associated with rapid population growth and the intensifying effects of climate change. The linkages between disaster risk financing and adaptive social protection systems developed over the last decade are world-class innovations aimed at building resilience and shielding the most vulnerable communities from the devastating impact of climate shocks. Institutional fragmentation, however, remains a challenge. The social protection policy framework remains incomplete, and the sector relies on an excessively low national budget allocation with 95 percent of its resources provided by donors. Reforms should emphasize sustainable financing and prioritize the progressive expansion of coverage and benefit levels.

"Malawi's social protection system has evolved dramatically over the last two decades, beginning as a collection of fragmented, small, and exclusively donor-financed initiatives, to a coherent set of programs, some of which cover large sections of the population. The efforts to make Malawi's social protection system more responsive to shocks have demonstrated the potential both to provide immediate relief to households in the face of crises and to build long-term resilience among the households and communities. Therefore, establishing a financing framework to gradually formalize social protection as a standard expenditure item in the national budget is a right way for sustainable support," says Robert Chase, World Bank Practice Manager forSocial Protection and Jobs, Eastern and Southern Africa Region.

The MEM outlines urgent actions required to rebalance the economy and enable faster, more inclusive growth. They include: i) restoring macroeconomic stability through fiscal consolidation, external debt restructuring, and containing the growth of domestic borrowing, ii) bolstering food security, building resilience, and protecting the poor to alleviate food insecurity, and iii) strengthening the agriculture production and reforming the system of price controls to avoid distortions that discourage production and exports.