Malawi’s economy has been affected by drought and floods for the past two years. Because of its narrow export base, specialized agriculture based economy and aid dependency, its economic growth decelerated to 2.9% in 20151. Despite this outlook, the FY2016/17 budget was geared towards stimulating growth and development. The financial statement projected expenditure at MK318 billion about 90% of this projection (MK283 billion) is expected to be sourced from donors through budget support.
However, due to corruption cases involving high ranking officials, donors withheld their support, affecting budget implementation. For example, the budget allocated MK140.5 billion to development by mid-year, but reality on the ground indicates that a total of MK88 billion was spent with MK76 billion from donors and MK12 billion from local resources. Another reason for decrease in donor support and development aid can be attributed to the political climate in Europe and the United States, both primary supporters of Malawi’s development budget through the EU, DFID and USAID. The United States president, Donald Trump, has cut the foreign aid budget by about 28% as the United States looks set to shift from soft power to hard power and from interventionism to isolationism and protectionism.
From these external political and economic changes, it has now become evident that Malawi needs to rely more on domestic resources for its budget. For example, Britain’s Brexit prospects do not paint an optimistic picture for its international development agenda. An early example of the changes to come is the announcement by DFID that it will stop supporting the Farm Input Subsidy Programme (FISP) from July 2017. This will increase vulnerability of smallholder farmers who depended on the subsidy in order to access expensive farm inputs such as seeds and fertilizer.
The IMF visited the country in March 2017 for a final review of the ninth Extended Credit Facility (ECF) programme following the December 2016 ECF facility extension. The assessment of Malawi’s policies to bring inflation down and the implementation of basic fiscal reporting to restore the public’s trust and confidence in the budget was of particular interest. It is important to note that as of October 2016, Malawi’s inflation was recorded at a distressing 22.8%, the highest in the SADC region. However, recent figures show a satisfactory drop in inflation from 18.2% in January 2017 to 16.1% in February 2017. This portrays a positive picture for the country as inflation has been intractably high since 2012.
The new inflation figures brings hope to the country’s economic outlook, with the IMF projecting real GDP growth to pick up in the range of between 4% and 5% in 2017. However, there are still challenges ahead if the country is to sustain this growth. The government must create more room to generate the needed tax revenues to fund current expenditures, and recast Malawi’s budget towards infrastructure development. Moreover, the projected economic improvement remains vulnerable to climate and external shocks. The agriculture based economy, in which tobacco accounts for 55% of its total exports, could be affected by political uncertainties facing its main export partner, the EU, which accounts for 50% of Malawi’s exports.
1 African Development Bank
2 International Monetary Fund