Impact of Political Uncertainty on Malawian Growth

Impact of Political Uncertainty on Malawian Growth

After two successive seasons of reduced crop harvests due to the El Niño related drought, Malawi experienced a slow rate of growth at 2.7 % economic activity in 2016 a drop from the 3.3 % in 20151. The drought severely affected these ratings affecting manufacturing through poor power supply, discouraging investment and placing even greater pressure on the depreciating kwacha. The landlocked economy depends largely on its agricultural sector, with its key exports being tobacco, tea, and sugar2.

 

Agricultural production accounts for one third of the country’s GDP, 80% of the labour force and 80% of exports3. The weather shocks have caused the greatest levels of food insecurity in over a decade, and become a hurdle to reducing poverty4. Politically Malawi has had a stable democracy since 1993 – the next elections are set for 2019. However, fiscal irresponsibility and mismanagement from the state have gravely affected the economy. Under the current leadership of President Peter Mutharika, according to the World Bank stability indicator (-2.5 being weak and 2.5 strong), the country has fallen from a ranking of 0.08 in 2014 to -0.06 in 20165. With 50.7% of the population below the poverty line it is advisable that Malawi start encouraging foreign investment instead of foreign aid on which they largely depend6. This however, has been made difficult by lack of strong institutions, poor transparency and a weak judicial system and link between law and practice. This has resulted in a slow pace of poverty reduction.

 

Fiscal irresponsibility has affected social development following the “Cashgate” scandal. This was the misappropriations of funds between the months of April to September 2013, audits found USD 18.6 million distributed between unrelated companies, individuals from unconnected organisations and inflated prices paid to companies with limited or no trading history and very large amounts of cash withdrawals7. The amount would be even larger considering the numerous cash amounts withdrawn that the Reserve Bank failed to pick up. It is fair to say that such governance failures undermine investment. With Malawi being heavily dependent on foreign aid, government’s grant income is expected to continue declining by 8.3% to USD 175 million (2.6% of GDP) in FY2017/18, from an estimated USD 19.2 million (3.3% of GDP) the prior year8. 2017 has seen some of the lowest foreign aid amounts received by Malawi, at USD 195.7 million compared to USD 203.7 million in 20139.

 

Hence it is vital that the government find ways to start encouraging foreign direct investment in order to expand the tax base and diversify the economy. This will require structural improvements in terms of governance and accountability in order to deal with institutional weakness and to attract investor confidence. However patronage networks and institutional weaknesses are entrenched, and this has been the main reason for the slow pace of poverty reduction. Official Development Assistance (ODA) has declined due to funding being channelled outside of national government systems, and due to lower surplus capital to finance development as a result of slow global growth. As a result, the government now has even less resources to support livelihoods as they recover from the drought impact, which has increased reliance on external funding and donor finance.

 

The Malawian climate fluctuates between extremes of severe floods and drought on a cyclical basis, which makes it difficult to ensure food security and resilient livelihoods. The Livelihoods and Resilience Programme starts a new cycle in 2017, aiming to support more than 35 000 extremely poor and vulnerable beneficiaries10. The World Bank has recently approved an interest-free loan of USD 85 million to Malawi, under its Agricultural Support and Fiscal Management Development Policy Financing facility11. The World Bank forecasts GDP growth from 2.5% in 2015 to 4.2% in 201712. These global changes will require Malawi to strategically place itself, in order to receive the full benefits of policy implementation. Strengthening the judiciary, and matching the current economic climate so as to increase the reserves that may protect them from unpredictable climate change.


1 Ministry of Finance, Economic Planning & Development

2 The Heritage Foundation

3 World Bank; World Bank

4 Famine Early Warning Systems Network

5 World Bank Group

6 World Bank

7 National Audit Office of Malawi

8 World Bank, ibid.

9 ForeignAssistance.gov

10 World Bank, ibid.

11 World Bank

12 World Bank, ibid.


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