One of the country’s financial and economic advisory agencies says Malawi’s economic outlook for 2016 is “mixed and murky” as Malawi is passing through tough times.
Alliance Capital Limited (ACL), in its Annual Economic Review and Outlook report released on Tuesday said Malawi’s economic woes are a result of poor agricultural output, a volatile exchange rate, an increasing fiscal deficit coupled with the ongoing suspension of budget support.
“These [negative factors] usher in what is expected to be a challenging year. Prices are expected to soar even high in the short term,” reads the report signed by ACL managing director, Christian Majavina.
Eratic rains currently being experienced, says ACL, will push the food lean period further, thereby putting pressure on food prices.
It also says the effects of the forecasted El Nino are expected to hit hard on crop output.
On the continued depreciation of the Malawi kwacha, ACL describes it as “unprecedented” and expects it to enhance inflationary pressure.
It predicts that the exchange rate will depreciate further, especially against the US dollar as exports remain weak.
This, it says, will be aggravated by the firming of the US economy and its currency which is expected to continue to gain value globally.
“In a net importing economy like Malawi already dealing with a wide balance of payments and a sluggish export pace, the effects on the kwacha will be negative. The country needs more exports to offset the gaining of the US dollar,” reads the report.
And ACL says due to the negative factors, 2016 should be characterised by tight monetary policy which will continue to keep interest rates high, especially if government will continue to run a large budget deficit and finance it through domestic borrowing.
ACL also says recurring utility supply problems resulting from lower water intake levels and declining efficiency at Malawi’s key hydropower generating facilities on the Shire River will also create challenges for businesses, particularly in the manufacturing sector.
Prospects for the tobacco industry are also looking gloomy, largely because of overproduction of the crop last season and ACLexpect this to dampen prices next year.
Business confidence and foreign direct investment will also be at a low and that continued negative reporting of the Malawi economy is likely to persuade investors against setting up shop in Malawi as it paints a picture of a country going through “almost irreversible” economic chaos.
“If the problems persist, economic growth will continue to be sluggish,” said ACL.
“However, solution-oriented coverage of Malawi has potential to boost tourism, significantly improve confidence and inspire productivity in the economy,” reads the report.
Since inflation is also influenced by fuel prices, implementation of ethanol fuel may improve outlook of inflation.