Inappropriate policies slowed Malawi’s economic growth in 2012

Nov 11, 2013

The agriculture sector which dominates economic activities shrunk by 3.0% in 2012. Photo: UNDP Malawi

The 2013 African Economic Outlook has indicated that Malawi’s real GDP growth significantly slowed down in 2012 to 4.3% from 6.3% in 2010 mainly due to inappropriate policies that led to a growing fiscal deficit, raising inflation and the depletion of international gross reserves in a context of an overvalued exchange rate.

This was the especially before President Joyce Banda took over the country’s administration in April 2012.

According to the report, the said macro-economic challenges sharply led to the contraction of the agricultural and manufacturing output. The agriculture sector which dominates economic activities shrunk by 3.0% in 2012 on account of erratic rains and the collapse of tobacco auction prices.

Nevertheless, the reports projects growth in 2013 and 2014 to rebound to 5.5% and 6.1% respectively. This rebound is premised on a revival in tobacco production, an easing of the foreign exchange constraint, improve availability of fuel and continuation of prudent macroeconomic policies.

The bold micro economic policy adjustment measures instituted by the current government including devaluation of the local currency, tightening of the monetary and fiscal policy and a removal of subsidies on fuel, have started yielding results, as evidenced by the easing of fuel shortages and improved access to foreign exchange by the business community.

However, the report warns that this economic recovery is fragile and the exchange rate may take time to stabilise given the excess demand for foreign exchange.

Even though the mineral exploitation has had very minimal impact on the country’s economy, the report argues that there is potential for minerals to transform the Malawian economy by generating resources for investment in infrastructure and social service delivery and through spill over effects on local industries, including small and medium-sized enterprises (SMEs) and beneficiation.

Going forward, the report says that the country faces a huge challenge to ensure that the country’s natural resources are managed in environmentally sustainable ways and that the wider population benefits from them through transparent mechanisms in awarding contracts/concessions and in the distribution of revenues.

The African Economic Outlook is prepared by a consortium of four teams from the African Development Bank, (AfDB), the OECD Development Centre, the United Nations Development Programme (UNDP), and the Economic Commission for Africa (ECA). The complete AEO, including full country notes can be accessed free of charge on the common website of the AEO partners: www.africaneconomicoutlook.org/ as well as on the OECD iLibrary: http://dx.doi.org/10.1787/aeo-2013-en.

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