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Malawi: Country Brief

Malawi Economy 2012

In the last two years, Malawi’s economic growth has been slowing down from a peak of 9.7% in 2008 to a projection of less than three percent in 2012, way below Africa’s average projected growth of 4.8%. Foreign exchange shortages, fuel and electricity supply shortages continue to be constraints to the business environment, and the cost of living keeps going up. Headline inflation has been on the rise since the turn of the year, up to 25% in August 2012 from 10.3% in January 2012 compared to single digit figures in 2010. Since 2005, Malawi had enjoyed uninterrupted solid growth for five consecutive years averaging about seven percent, backed by sound economic policies and a supportive donor environment. But since 2010 the policy environment began to deteriorate resulting in acute economic problems.

Poverty in Malawi continues to be above 50%, with a quarter of the population still ultra-poor. The 2010/11 Integrated Household Survey - which provides an update of the country's socio-economic situation, including indicators on poverty, education, health, and household enterprise - shows that the  incidence of poverty as measured through the Headcount Index has declined slightly from 52.4% (in IHS 2 conducted in 2005) to 50.7% in IHS3 . The poverty levels for urban and rural areas declined from 25.4% to 17.3% and 55.9% to 56.6% respectively. In terms of ultra poverty, 24.5% of the population is in this category at the national level, and the corresponding proportions are 4.3% and 28.1% for urban and rural areas respectively. Income distribution, as measured through the Gini coefficient, has deteriorated from 0.39 in 2005 to 0.45 in 2011.

Since May 2012, the government has been implementing tough but critical macro and structural reforms aimed at turning around the economy. These include devaluation of the local currency by close to 50 percent then allowing it to float. The economy however remains fragile, with further depreciation of the Kwacha triggering fluctuations in the prices of fuel.

In addition to the reforms, the government has launched an 18 month Economic Recovery Plan (ERP) that focuses on a few priorities that are “pro-growth, represent quick wins, and are highly effective.” This plan stresses need for social protection programs (Farmer Input Support Program (FISP) and other assistance to small farmers, public works, school feeding, scholarships for girls, cash transfers) and identifies diversified commercial agriculture, tourism, energy, mining and infrastructure/Information Technology and Communications (ITC) as sectors that can help turn around the economy and provide the initial building blocks towards structural transformation, needed to successfully implement the Second Malawi Growth and Development Strategy (MDGSII.) The World Bank has provided urgent support to the economic recovery program through its Rapid Response Program  for both social protection and budget support. Other development partners are also on schedule to provide budget support after the resumption of the International Monetary Fund (IMF) program that had gone off track in 2010.

Although the role of the mineral sector in the economy is increasing with the Kayelekera uranium mine opened in 2009, agriculture still remains an important source of growth, and it can continue to be a significant driver of growth through regional exports and import substitution. While services contribute 33% to gross domestic product (GDP), these are services linked to the agriculture sector which contributes 28% of GDP and manufacturing and mining at 10 and two percent of GDP respectively. The country's export trade is dominated by tobacco, tea, cotton, coffee, and sugar. In 2012 tobacco production significantly decreased by more than 75% compared to 2011 (237,000 tons).

Political Context

President Mrs. Joyce Mtila Banda is Malawi’s 4th president since Malawi re-introduced the multiparty system in 1993.She replaced President Bingu wa Mutharika who succumbed to a cardiac arrest on April 5, 2012. The late Mutharika died in his second term of office. President Banda was the Vice President of Malawi having won as Mutharika’s running mate in May 2009 under the Democratic Progressive Party (DPP). But in In 2010, she was fired from DPP for refusing to endorse the late president’s brother as successor to Mutharika. She subsequently formed her own party the People’s Party (PP) in 2011.

In April 2012, President Banda formed a Cabinet largely dominated by members who have previously served in a Mutharika cabinet. She also included all major opposition parties in her Cabinet. This move resulted in her getting overwhelming support in Parliament from the opposition. Her PP does not have an MP elected under the Party’s ticket, but they were either fired from DPP or chose to support her when she became president. There has been a public outcry for the Speaker to invoke Section 65 of the Constitution that requires MPs who cross the floor to vacate their seats. In the last parliamentary poll held in May 2009, DPP scooped 60% of the 193 seats. About 17% went to independent candidates, leaving six political parties sharing the remaining 23%.

A number of concerns over democratic governance issues have been resolved under the Banda administration. These include repealing laws that were disrespecting human rights and freedoms enshrined in the Constitution as detailed in a 20-point petition presented to the Mutharika administration in July 2011.

Malawi is due to hold elections in 2014 and the plan is to have tripartite elections (presidential, parliamentary, and local government.)The country has operated without local councilors since 2005.

 

Development Challenges

Malawi’s population is estimated at 15 million, with a poverty headcount of 50.7% (IHS3). Social indicators show some improvements: Life expectancy has improved to 52.2 years in 2009 from less than 40 at the turn of the century; adult HIV prevalence is now at 10.9 percent down from 14%. Food security has significantly improved.  Malawi is likely to achieve four out of eight MDGS -- with poverty, gender inequality, universal primary education and maternal mortality unlikely to be met.

Despite progress on social issues, Malawi’s development path has several challenges:

  • Sustainability of policy reforms remains as a challenge. The country’s history of policy implementation has been largely characterized by periods of good policy implementation with episodes of policy reversals associated largely with different political cycles. Macroeconomic stability following the actions taken by the new administration is still fragile and would critically depend upon the continuance of the policy measures instituted.
  • Investment climate constraints hinder private investment. The business environment in Malawi has deteriorated in recent years resulting in a slowdown in FDI and reduced competitiveness. The 2009 Enterprise Survey for Malawi listed the top five main obstacles as access to finance, transportation, informal practices, electricity, and tax rates. While the new Government has made commendable efforts on the macroeconomic stability, improving the business environment needs establishing policy certainty and predictability.
  • Adequate skilled labor is a constraint to a private sector-led growth. While private returns to higher education in Malawi are relatively high, Malawi continues to rank very low on knowledge, innovation, and technology. The World Bank Knowledge Economy Index (KEI), a broad measure of the overall level of preparedness of a country or region for the knowledge economy, ranks Malawi as the lowest in the region. Transitioning countries like Malawi are at risk of being further marginalized in a highly competitive world economy because their tertiary and other post basic education/training programs are not adequately prepared to capitalize on the creation and use of knowledge. In addition, Malawi faces a serious human capacity problem with its labor market that is characterized by large number of unskilled workers with low productivity.
  • Despite investments in women’s empowerment resulting in notable progress in some key areas, women in Malawi are still disadvantaged in numerous ways. The Malawi Poverty and Vulnerability Assessment (2007) indicates that female-headed households constitute 23% of all households. The maternal mortality rate continued its downward trend from 984 in 2004, and 807 in 2006 to 675 per thousand live births in 2010, but remains high.
  • High population density and poverty have led to significant human pressure on the environment and degradation of Malawi’s natural resource base, notably land and forests. The growing population increases the land area under cultivation and exploits forests and woodlands for firewood and charcoal production. Land degradation, deforestation, inappropriate farming methods, and limited incentives to promote land and water conservation techniques have increased the incidence of erosion, run-off and flash floods in Malawi, carrying high loads of sediment that are deposited in reservoirs and flood-plains. Together, these factors reduce agricultural productivity, fisheries, and hydropower generation, damage infrastructure, and adversely affect human health and critical ecosystems.
  • Malawi is prone to natural disasters primarily related to climate variability and change. Improved resilience to climate risks is extremely important for the majority of rural households who depend on the fragile natural resource base for their livelihoods. Forest cover is reported to decrease at an alarming rate, and the energy balance has not changed away from biomass at all. Rural roads and the rail network are particularly vulnerable to the effects of climate change due to increased run-off rates.

New 5th CAS (2012-2016)

The Bank is finalizing its 5th Country Assistance Strategy (CAS) for Malawi for the period FY13-FY16.  The new CAS is expected to be ready by the end of 2012.

The new Bank strategy has been informed and enriched by a number of documents, views from stakeholders and lessons from various activities. Since the Bank supports the government program, a primary document was the government’s poverty reduction strategy, MDGS II. The relevance and appropriateness of the Bank’s program proposal was beefed up and verified by a range of stakeholders through group consultations and individual surveys of about 600 representative clients.

The Bank also hinged its strategy on the Bank’s Africa Region Strategy, lessons from implementing the immediate previous country partnership strategy, and knowledge and advice from the 2012 World Development Report. Above all, the Bank drew this strategy with a commitment to achieve results both in investments operations and knowledge and analytical work, to ultimately contribute to improving lives of Malawians.

The new Country Partnership Strategy (CPS) aims to address gaps in the achievement of the Millennium Development Goals (MDGs) through a program with the following thematic areas:

Theme 1: Promoting Sustainable, Diversified, and Inclusive Growth

Under this theme, the Bank will support efforts to:

  • Restore sound macroeconomic management through improved efficiency and targeting of public expenditures, adoption of an appropriate exchange rate regime and foreign exchange system, better monitoring of budget planning and execution, and strengthened domestic debt management
  • Enhance the business environment by improving the ease of business processes, increasing the use of effective public-private partnerships (PPPs), especially in agriculture, energy, irrigation, transport and tourism
  • Improve access to financial services
  • Easing energy and other infrastructure constraints
  • Increase entrepreneurship and skills, and promoting regional integration and regional infrastructure by enhancing access to ports through improved railway and road connectivity and streamlining cross-border customs clearance processes and,
  • Strengthen diversification and increase productivity, particularly for crops and exports, and, improve overall land and water resource management and institutional capacity

Theme 2: Enhancing Human Capital and Reducing Vulnerabilities

This theme supports government efforts to accelerate progress towards the Millennium Development Goals (MDGs) by improving the delivery of social services in education, health, nutrition, youth development, and water and sanitation. In enhancing human capital, the Bank will continue its support to the National Education Sector Plan, the national HIV/AIDS strategic plan (2011-2016), and improving nutrition security. In lowering vulnerability and enhancing resilience, the Bank will focus on improving social safety net systems for the urban and rural poor including in times of natural disasters and other shocks. The Bank will also continue supporting the National Water Development Program to increase access to sustainable water supply and sanitation services. Better preparedness for and mitigating vulnerabilities against climate change and disaster risks will also be another key focus area.

Theme 3: Mainstreaming Governance for Enhanced Development Effectiveness

This theme comprises a cross-cutting effort to help strengthen both supply-side and demand-side institutions, with a focus on mainstreaming across the portfolio. The supply-side comprises public sector governance mechanisms through which the government organizes itself to deliver on the strategy. Examples are improving public financial management and procurement systems; monitoring and evaluation (M&E), including an enhanced statistics system; and improved decentralization capacities. On the demand side, focus will be on strengthening social accountability for service provision using mechanisms that produce and make available to citizens and users information on the magnitudes of budgetary transfers to front-line service provision units, and to local governments, as well as the obligations and commitments of government in relation to what services citizens should expect, and actual performance of front-line service provision units.

Current Portfolio

As of July 2012 the Bank portfolio in Malawi has 13 projects with a commitment value of $973.15 million. Since 1966, the Bank Group has committed about US$2.7 billion to Malawi supporting over 125 operations. Of the five World Bank Group agencies, the International Development Association (IDA) has the most operations followed by the International Finance Corporation.

Results of the Fourth CAS (FY07-FY11)

The 4th CAS set out to help Malawi build foundations of prosperity. This meant focusing on such issues as agriculture, education, HIV/AIDS, private sector development, and ensuring better public expenditure management. These issues were divided into four pillars with the following results:

Small holder agriculture

Increasing productivity and food security was a priority, with yields expected to improve through increased irrigation and market incentives, specifically for smallholder farmers in the 11 districts supported by the Bank program. Through three projects: Community Based Lands Development Project (CBRLD), Irrigation, Rural Livelihoods and Agricultural Development Program (IRLADP) and the Agricultural Development Program-Support Project (ADP-SP) the following had been achieved by 2010:

  • The country’s 4 major irrigation schemes rehabilitated and fully functional, and more that 3000 ha on small and medium scale irrigation schemes, increasing rice and maize yields by a minimum of 30 per cent. Together with the Farm Input Subsidy Program, the majority of households were food secure in the last 2 years.
  • Fifteen thousand people were resettled from densely populated areas, enabling them to double or treble their food production capacity. From this resettlement program, Government has drawn lessons to inform its land reform program.
  • Micro-weather insurance schemes initiated with Bank support are expanding on commercial terms with growing interest from the Banks and Insurance Association of Malawi.

However, a lot more remains to be done to put agriculture in Malawi on a commercial footing. The Bank is still in the initial stages of work with the Ministry of Agriculture and Food Security to develop a project to promote more commercialized farming practices.

HIV/AIDS and Nutrition

Behaviour changes were expected in order to contribute to a slowing HIV infection rate and an increased number of people on ARV treatment. It was also expected that Government would develop a coherent Program on improving the nutritional status of children under two years of age.The following was achieved:

  • Number of people living with HIV/AIDS receiving anti-retroviral treatment improved from approximately 57000 in 2006 to close to 200,000 in 2010, exceeding original targets.
  • Malawi’s HIV adult prevalence rate decreased to 10% by the end of 2011. Access to treatment has also contributed to improving life expectancy to 52 years from 38 years in 2005.
  • Chronic malnutrition now at 36 percent compared to about 49 per cent in 2005.

Malawi still lacks a coherent program on nutrition although a nationwide awareness and information campaign which was undertaken promoted good feeding practices for under-5 and school-age children. A multi-partner sector study examining determinants of infant and child feeding practices has been completed, and will provide a basis for a nutrition program. The Bank and other donors will follow on with a nutrition project in the 5th CAS.

Environment for doing business

The program expected to achieve improvements in the efficiency and reliability of electricity supply, and “Doing Business” indicators for increased trade across borders and reductions in the costs to start a business. The major achievements were:

  • Access to commercial justice improved with the establishment of the High Court Commercial Division in 2007. Time to settle commercial disputes reduced to 98 days in 2011, down from 337 in 2006.
  • Time to register a business reduced from 88 days in 2010 to 49 days in 2011.
  • Improvement of the sector management and governance due to the establishment in 2008 of the Malawi Energy Regulatory Authority (MERA), and an increase in tariff levels by an average of 56% from very low levels, which will strengthen the financial position of the power utility ESCOM.
  • Improvement in the condition of the road network: The Bank’s Road Maintenance and Rehabilitation Project (ROMARP), which closed in June 2006, established the roads database and the Road Fund, and supported significant institutional reform of financing and planning in the roads sector. Investments in the road sector have resulted in a significant improvement of the network: the Ministry of Transport and Public Infrastructure reports that 83% of classified roads are in good or fair condition. The Bank and European Commission have supported the preparation of a multi-modal transport study and Government is preparing a Transport Sector Investment Program. The condition of the road network has improved significantly, and the outlook for the financing of maintenance through road user charges is encouraging.

The underperformance emanated from three main areas: lack of improvement of the business environment especially the energy agenda where the interconnector project was cancelled; delayed implementation of reforms; and, the deteriorating political economy.

Improvements in government expenditure management

Malawi was expected to achieve improvements in expenditure management as measured by the public financial management (PEFA) indicators. Below are some major achievements:

  • Comprehensiveness and transparency of the budget: Government progressed in improving the linkage between the MGDS and the budget. Since 2008/09, Government introduced an output based budget framework where Ministries, Departments and Agencies (MDAs) are now required to make their budgets according to MGDS priorities. Further, the presentation and structure of the budget, together with the associated chart of accounts, have been improved to become compliant with international fiscal reporting standards.
  • External Audit and Scrutiny: Progress has been made to improve the timeliness and coverage of audits. Government has since cleared the backlog of audits and is now current with the audit of the 2009/10 financial statement.
  • Progress on capacity development in internal audit with all ministries now having internal audit units, and at least 60 percent of the ministries have fully functional audit committees.

The key challenge in audit and external scrutiny is to make timely follow-ups of the audit issues raised by the Public Accounts Committee of Parliament.

Analytical and Advisory Activities

Some of the notable AAA that have made a significant contribution to the Malawi planning and policy environment include the Education Country Status Report (CSR), the Mining Sector Review, the Country Economic Memorandum (CEM), the 2008 Financial Sector Assessment (FSAP) and the Malawi Social Protection Stock Take. The CSR brought into focus issues affecting the quality of education in Malawi at various levels. The findings fed into the National Education Sector Plan (NESP) which has assisted the Government to leverage resources from various donors and the Fast Track Initiative (FTI). The Mining Sector Review (MSR) in 2009 brought worldwide experiences in the management of mining transactions and informed the design of the Mining Policy which is undergoing Cabinet review. Malawi needed such experience since it is a newcomer in the mining arena and the MSR provided the analytical underpinnings of a new Mining Governance and Growth Support Project which is scheduled for Board in March 2011. The CEM is a rich piece which acknowledges the progress that Malawi has made in improving its macroeconomic environment and proposes options on maintaining the status quo or ensuring continued future growth. The 2008 FSAP was instrumental in bringing financial sector development to the policy debate in Malawi and its recommendations have greatly assisted in leading to other AAA such as the development of the Malawi Financial Sector Development Strategy and Finscope Demand and Supply Side Surveys. A Financial Sector TA operation has also been developed to implement the recommendations of the FSAP. The Social Protection Stock Take informed the design of the social protection policy through provision of a stock take of social protection in Malawi and, in partnership with the development of a Malawi Social Protection Framework, helped Malawi move towards the development of the Social Support Policy and Program.

Implementing the Paris Declaration in Malawi

Malawi’s main donors are DFID, EC, World Bank, African Development Bank, Norway, Germany, USAID, and China, which established diplomatic ties with Malawi in 2007. These account for over 90 percent of Malawi’s development assistance. Other donors include the traditional UN institutions (notably UNDP, UNICEF, WHO, and WFP), Global Fund, JICA, ICEIDA, and Ireland.

Government is leading coordination of donor support through its Development Assistance Strategy (DAS) which is a coordination plan aimed at improving the effectiveness of aid inflows to Malawi and defining what Government and Development Partners (DPs) have to do to implement the Paris Declaration on Aid Effectiveness. The DAS sets out principles, roles, and structures, and has an action plan and a monitoring framework. In early 2010, in line with DAS, DPs and Government established sector working groups whose responsibilities include guiding prioritization of donor aid at sector level.

Donors in Malawi are increasingly implementing the Paris Declaration Principles in their development assistance. To date, there is pooled funding which accounted for 23 percent of Official Development Assistance (ODA) in FY2008/09. There is pooled funding in HIV/AIDS managed by the National AIDS Commission. The sector wide approach (SWAp) has been used in health as well. In education, the government signed an MoU with all Education DPs in January 2010 that outlines the collaboration among partners and between the DPs and the government. IDA, DfID, German Development Cooperation and UNICEF are the subset of Education DPs who intend to pool funds. These DPs also signed a Joint Financing Agreement in 2010. Eleven DPs are also collaborating in the Education For All – Fast Track Initiative. In agriculture, the World Bank is playing a leading role working with government to establish a SWAp.

General budget support is also provided in a harmonized way through the Common Approach to Budget Support (CABS) group. The CABS group currently consists of DFID, EC, Norway, Germany, the African Development Bank, and the World Bank. IMF and UNDP are observer members. Thirty percent of ODA from 2009 to 2010 was budget support, an increase from 22 percent reported in 2008/09. The fundamental principles of Malawi’s budget support cooperation are based on commitment to poverty reduction, good governance, and sound economic management. Together with Government, the CABS Group has developed a Performance Assessment Framework (PAF), which provides a jointly agreed set of indicators for measuring progress against those commitments, in line with the MGDS. Each Development Partner’s bilateral agreement outlines how the PAF will be used. Since mid 2011, the CABS DPs suspended their budget support to Malawi because of economic governance concerns that led to the IMF program going off-track.

The Bank has collaborated with various donors in improving public sector management: For example: Implementation of an Integrated Financial Management Information System in collaboration with USAID and UNDP; Institutional strengthening and capacity development of the Central Internal Audit Unit in collaboration with the European Commission, including provision of training, equipment, software and work environment facilities; Construction of an Audit Training Centre in collaboration with the European Commission; and Introduction of a performance contracting system and annual performance reviews for all public servants, in collaboration with CIDA.

Development Partners are also collaborating in providing policy advice to Malawi based on joint analytic work. The Millennium Challenge Corporation, DFID, AfDB, and the World Bank recently collaborated in the 2009 Country Economic Memorandum (CEM) to advise and suggest policy options on how Malawi could build on its current growth through regional integration and trade. Some of the key messages are:

  • Agriculture will continue to be a significant driver of growth. Macro-economic and agricultural policy choices should therefore promote productivity and regional/international trade competitiveness.
  • Reliability of trade transport should receive more attention with policy focusing on maintenance and rehabilitation of infrastructure and regional trade facilitation.
  • Malawi needs to invest urgently in additional electricity generation.
  • Prioritization of public investments in power, transport and trade logistics should take cognizance of the nature of industry in the main cities of Blantyre and Lilongwe.
  • Malawi should continue with macro-economic management that continues to support growth.

Last updated October 2012




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