Malawi has struggled to sustain economic growth despite large inflows of official development assistance (ODA) averaging $1.1 billion or 12 percent of gross domestic product (GDP) per year in the past two decades, the International Monetary Fund (IMF) says.
This is contained in the recent IMF country report for Malawi issued after its board approved the country’s four-year $174 million Extended Credit Facility (ECF) programme.
Available data show that between 2005 and 2020, the country has registered an average growth rate of 4.9 percent compared with an average of 5.9 percent in low-income countries in sub- Saharan Africa.
“Exiting fragility has been challenging due to frequent natural disasters and droughts and floods that followed extreme storms partly due to years of deforestation.
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“Frequent natural disasters also led to the concentration of public and ODA resources to recurrent spending (including emergency assistance) away from development assistance that is much needed for sustainable growth,” says the report.
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The Bretton Woods institution says macroeconomic imbalances widened significantly due to several years of unsustainable domestic and external borrowing.
This, according to the IMF, followed the 2013 “cashgate”, which led to loss of access to donor support through the budget, which had averaged 4-5 percent of GDP annually.
“The government replaced this support with domestic borrowing; and the Reserve Bank of Malawi substituted aid inflows with foreign exchange swaps and short-term foreign exchange loans.
“This resort to debt finance for recurrent spending contributed to a rapid accumulation of public debt and foreign currency liabilities abroad,” reads the IMF report.
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The local economy has been experiencing the drag from macroeconomic imbalances, partly inherited but partly due to slow progress in correcting unsustainable fiscal and external policies according to the fund.
Despite this sizeable external financing, the large fiscal budget deficit (10.8 percent of GDP in 2022) necessitated domestic financing.
This has been addressed in large part through monetary financing, putting pressure on the exchange rate and increasing the rate of inflation.
But when presenting the mid-year budget statement to Parliament last week, Finance Minister Simplex Chithyola Banda said the government will continue addressing budget deficits despite the prevailing pressure.
He announced a revision in GDP growth forecast emanating from a macroeconomic imbalance due to the exchange rate misalignment, forex scarcity and exogenous shocks.
Malawi economic growth remains stagnant due to macroeconomic uncertainty and the lingering effects of external shocks.
Real GDP growth is now projected at 1.6 percent in 2023, from the earlier 1.7 percent.
Inflation is now expected to average 30.3 percent in 2023, up from 24.8 percent projected at the time of the first review, due to high food inflation and exchange rate pass-through.
By 2030, just about seven years away, Malawi aspires to become a lower middle-income economy.
Lower middle-income economies are those with a gross national income per capita of between $1,086 and $4,255.
But the country’s per-capita income, which is derived by dividing national income by population, is ranked one of the lowest in the world at around $600.
