LILONGWE, - February 27, 2024 - Malawi has taken bold actions to stabilize the economy, but 2023 entailed substantial economic challenges and GDP growth was only 1.6%. The resumption of energy production at the Kapichira Hydroelectric Power Plant has improved access to electricity and supported economic activity, particularly in the industry and services sectors. However, production inputs across sectors were often unavailable throughout 2023 due to foreign exchange shortages, dampening growth. This is according to the recently launched Malawi Economic Monitor, 18th Edition titled “Turning the Corner?” with a special topic, Healthy Watersheds for a Strong Economy.
Following Cyclone Freddy, agricultural output in 2023 was only marginally larger than in 2022. Rapid inflation (28% in 2023) and foreign exchange shortages throughout the year contributed to a weak business environment, further undermining economic growth. Many Malawians have been feeling the squeeze from the scarcity of available jobs and pressures on real wages. In 2023, approximately 71.7% of the population were estimated to be living below the international poverty line.
Macroeconomic imbalances persist despite stabilization measures. These measures include adjusting the exchange rate, tightening monetary policy to combat inflationary pressures, implementing fiscal, external, and monetary reforms, as well as a series of structural changes. The Reserve Bank of Malawi adjusted the exchange rate by 44% in November 2023, aiming to align with market fundamentals, but liquidity remains a challenge. Tightened monetary policy included raising the policy rate twice in 2023 to contain inflationary pressures, though money supply growth remained high. There is a notable shift towards fiscal consolidation to address unsustainable government spending and debt levels, with efforts to reduce the fiscal deficit to 7.4% of GDP in FY23/24, the first reduction in six years. However, the stock of public debt is estimated to have increased from 75.7% of GDP in 2022 to 81.3% in 2023. Public and publicly guaranteed debt remains in distress and is unsustainable, requiring timely and substantial debt restructuring.
Malawi’s economic recovery requires strong commitment to sustain reforms. Economic growth is projected to increase, driven by an improved macroeconomic environment, and sustained structural reforms. Growth is estimated to reach around 3% in 2024, primarily due to a modest easing of global commodity prices, a moderate improvement in agricultural production, and increased output bolstered by improved foreign exchange inflows. Over the medium term, growth is expected to average 4%, underpinned by ongoing and announced macroeconomic reforms designed to address external and fiscal imbalances.
The Malawi Economic Monitor highlights policy recommendations for bolstering macroeconomic stability through sustaining the ongoing macro-fiscal reforms and increasing the flexibility of the exchange rate, creating the foundations for export-led growth, and building resilience and protecting the poor.
This report’s Special Topic emphasizes the importance of prioritizing watershed management to bolster Malawi's economy. Through the rapid conversion of land for agriculture and widespread deforestation, Malawi has seen a dramatic loss of forest cover from 47%in 1975 to just over 20% in 2021. Runoff from degraded landscapes carries soils and agrochemicals, polluting watercourses, and wetlands and is leading to a loss of soil fertility. This is proving catastrophic for the natural resources that provide the basis for the country’s economy. Investing in watershed protection and restoration activities has the potential to substantially reduce soil erosion rates, improve crop productivity, and enhance water storage. Watersheds play a crucial role in sustaining the ecosystem, biodiversity, wildlife, agriculture, and human populations by serving as the natural resource base for all forms of life. The report highlights the need to put existing policies into practice and promote the involvement of the private sector.