The latest Malawi Country Economic Memorandum by the World Bank has said increasing trade volumes could help stabilise the economy.
The report comes at a time Finance Minister Simplex Chithyola Banda had said the process of recovering the economy has started.
According to the memorandum, Malawi’s chronic trade imbalance has worsened significantly in recent years, resulting in a consistent foreign exchange shortfall.
It says low levels of investment and high trade costs due to policy barriers, inefficient logistics and poor infrastructure, compounded by the structural challenges of being a small, landlocked country reduce overall economic resillence and negatively impact Malawi’s economy.
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The bank notes that Malawi’s export performance has been worsening largely due to its heavy reliance on one declining crop—tobacco.
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The Bretton Woods institution says the double burden of being overly dependent on a single commodity and the volatility of its other exports not only exposes the country to fluctuations in global commodity prices and demand dynamics, but also results in inadequate and unstable foreign exchange earnings.
“For exports to drive growth, Malawi must break the vicious cycle in which chronic trade imbalances and restrictive trade policies reinforce each other.
“Large policy distortions and foreign exchange rationing not only reduce access to inputs, but also act as a tax on exports, creating incentives for smuggling and informal trade, and hindering diversification into non-traditional exports with higher value added,” the report says.
It adds that Malawi has high potential to increase exports in non-traditional agricultural exports such as soybeans, macadamia, and groundnuts, as well as in mining.
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The bank says recent discoveries of energy transition minerals, including rare earths, niobium, rutile and graphite, present opportunities for increased exports and foreign exchange generation.
“Given its dependence on its neighbours both as export markets and to reach ports, reducing trade and transport costs will be essential for Malawi to leverage trade for growth.
“Central to this will be advancing trade facilitation and customs reforms, and especially the removal of non-tariff barriers, especially along key corridors. Integration through the African Continental Free Trade Area could bring significant benefits to Malawi particularly in the processed food, agriculture and trade sectors,” the bank says.
In his mid-year budget review statement, Chithyola Banda said government has lined up a number of activities such as carbon trading, discounting mineral deposits, labour exports and cannabis biomass project which would help bolster forex generation in the country.
“Malawi is one of the largest producers of cannabis in Southern Africa and at the prevailing market prices, this country has potential to generate over $700 million a year from cannabis biomass.
“The government is reviewing the Cannabis Regulation Act of 2020 to allow participation of the local cannabis on the international market. On the production side, joint venture negotiations between government institutions and private sector investors are at advanced stages,” Chithyola Banda said.
