Malawi at a Glance: 2000-01

COUNTRY REPORT

Malawi At a glance: 2000-01

OVERVIEW President Bakili Muluzi is expected to remain in power over the forecast period. But the main political parties, will, to varying degrees, experience internal disarray. A clear split has emerged in the main opposition party, the MCP, though the postponement of the September local elections should allow it to tackle its internal differences before they are held. A new uranium mining project will help the mining sector to develop, but infrastructure will need upgrading to attract further mining investment. Falling world tobacco prices in 2000, along with lower domestic production, will reduce export revenue, and increase the trade deficit. The rail link between Malawi and the Mozambican port of Nacala is scheduled to open in September, promising savings in transport costs, but improved track and signalling equipment is required. Key changes from last month Political outlook • There has been a major split in the opposition MCP party. John Tembo and Gwanda Chakuamba were both elected as party leader at parallel conventions in their respective regional strongholds. Economic policy outlook • The 2000/01 budget promises to build on the government’s reform efforts. But fiscal stability remains heavily reliant on foreign grants. Economic forecast • The EIU’s economic forecast remains essentially unchanged. Real GDP growth will slow to 3.5% in 2000, because of reduced agricultural output owing to poor weather. The rate of inflation will average nearly 29% in 2000 and the exchange rate will slip to MK65:US$1 by end-2000.

September 2000

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Outlook for 2000-01

Political outlook

Domestic politics The main opposition alliance, of the Malawi Congress Party (MCP) and the Alliance for Democracy (Aford), has indicated that it will appeal against a court ruling upholding the result of the 1999 presidential election. Nevertheless, the president, Bakili Muluzi, is expected to remain in power throughout the forecast period. This will ensure that the domestic political scene remains generally stable throughout 2000 and 2001.

A second case brought by the alliance over electoral fraud has yet to be heard in the High Court. However, even in the likely event that some evidence of vote-rigging in favour of the ruling United Democratic Front (UDF) is discovered, this will not have been on a scale large enough to have affected the outcome of the election. In addition, all the main opposition parties seem to be facing a degree of turmoil. According to the constitution, Mr Muluzi has to stand down at the next election, which is scheduled for 2004; and whether or not the UDF attempts to alter the constitution, leading party members will vie with each other for the succession. This issue recently claimed its first high- profile victim—the party treasurer, James Makhumula Nkhoma—and the split in the party’s upper echelons will become more divisive.

Election watch More public, and potentially damaging, is the dispute within the MCP-Aford alliance, and in particular within the MCP itself, which will allow the UDF to maintain and possibly increase its slender majority in parliament. The MCP’s deputy leader, John Tembo, is beginning another campaign for the party leadership against the incumbent, Gwanda Chakuamba, which has created a clear split in the party. The two factions held parallel conventions in their respective regional strongholds in early August to elect their choice of party leader (the results of both ballots were nullified by the courts). The dispute also jeopardises the future of the alliance, as members of both MCP factions are in favour of terminating the relationship with Aford. The future of the MCP is under threat, although the postponement of the local elections, which were scheduled for September and in which the party was expected to perform poorly, may have saved it from serious electoral losses.

International relations Regional instability will continue to cause concern. The continuing conflicts in the Democratic Republic of Congo (DRC) and Angola, and unrest in Zimbabwe, will all have a negative effect on the international view of the country, although Malawi is not expected to be dragged into any of the external conflicts.

Economic policy outlook

Policy trends Policy recommendations from Malawi’s consultative group (CG) of donors largely correspond with the ten-point plan presented in March by the finance minister, Matthews Chikaonda. Strengthening fiscal discipline, increasing

EIU Country Report September 2000 © The Economist Intelligence Unit Limited 2000 2 Malawi

accountability and accelerating liberalisation are not popular policies and will prove difficult to implement. On the other hand, significant policy slippage will jeopardise donor funding—the CG pledged US$1.1bn in aid and discussions are under way for new loans from the IMF under the poverty reduction and growth facility (PRGF).

Mr Chikaonda has built up his credibility with the donor community, and this should help him to win the support of most senior party members for the 10- point plan which embodies the government’s commitment to reform. Nonetheless, because of concerns over domestic popularity and vested interests the government is looking to reduce its reliance on donor support. Efforts at economic diversification will continue as foreign governments discourage the domestic consumption of tobacco, the country’s largest foreign-exchange earner. There is potential in growing horticultural crops such as paprika, fruits, vegetables and cut flowers, but it is unlikely any will replace tobacco as the leading foreign-currency earner over the forecast period. Attempts to exploit the country’s mineral reserves will be less successful, although the Australian mining company, Paladin Resources, has announced a US$60m uranium mining project in the north of the country. However, improvements in infrastructure will be necessary to make other mineral discoveries viable. Manufacturers will benefit from the reduction of import duties on raw materials and intermediate goods in the recent budget, although inadequate power distribution will continue to prove a hindrance.

Fiscal policy The budget for the 2000/01 fiscal year (July-June) places tight controls on government expenditure, although there will be some resistance to this from within government departments. Greater transparency and re-prioritisation should improve the effectiveness of the spending undertaken. Civil service reforms (under the 10-point plan) will further improve the fiscal position, but will also be unpopular.

State expenditure in the forecast period will focus on government efforts to diversify the economy, improve social provision and reduce subsidies to public- sector enterprises. Reforms aimed at improving revenue collection were successful in 1999/2000 and, together with a broadening of the tax base, should help to reduce the fiscal deficit to 0.7% of GDP in 2000 and 0.5% of GDP in 2001. The fiscal position will, however, remain heavily dependent on foreign grants. Any worsening of relations with foreign donors will jeopardise Mr Chikaonda’s fiscal discipline.

Monetary policy The Reserve Bank of Malawi (RBM, the central bank) is expected to maintain a tight monetary policy, which will help push down the rate of inflation over the forecast period. However, given the fall in the rand and the expected knock-on effect of this on the kwacha and Malawian inflation, rates will have to stay higher for longer than was previously forecast. Not only will this crowd out private investment, but it will also conflict with the government’s desire to source more of its funding requirement domestically as it will increase the cost of servicing domestic debt. This will put more pressure on the government to adhere to its planned budgetary prudence in order to reduce the fiscal deficit and thus allow a reduction in Treasury-bill rates. Mr Chikaonda has promised

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to increase the independence of the RBM, but if his 10-point plan is to be enacted, increased politicisation looks more probable.

Economic forecast

International assumptions The outlook for Malawi’s key exports in 2000-01 are mixed. The EIU forecasts that tobacco prices will fall by 8.9% in 2000 to US$3,100/tonne, and will remain flat in 2001. Tea prices are expected to rise by 4.3% in 2000 to US$1.83/kg, but will fall back to US$1.78/kg in 2001. In 2000 real GDP in Malawi’s main export markets—South Africa and the EU—is expected to grow by 3.2% and 3.4% respectively. However, there is a more varied outlook for Malawi’s neighbours, which will limit the growth of non-traditional exports.

International assumptions summary (% unless otherwise indicated) 1998 1999 2000 2001 GDP growth US 4.4 4.2 5.2 3.0 OECD 2.4 2.9 4.1 3.0 EU 2.7 2.3 3.4 3.0 Exchange rates (av) US$ effective (1995=100) 119.3 116.4 118.7 113.7 US$:€a 1.12 1.07 0.95 1.03 R:US$ 5.48 6.11 6.70 7.05 Financial indicators US$ 3-month commercial paper rate 5.34 5.18 6.39 6.55 € 3-month interbank rate (DM before 1999) 3.53 2.97 4.30 4.80 Commodity prices Oil (Brent; US$/b) 12.8 17.9 27.1 22.0 Tobacco (US$/tonne) 3,342 3,403 3,100 3,100 Food, feedstuffs & beverages (% change in US$ terms) –13.9 –18.6 –2.5 6.1 Industrial raw materials (% change in US$ terms) –19.6 –4.3 15.3 6.9

a Ecu before 1999.

Economic growth Production of tobacco, the main determinant of economic growth, is forecast to fall by 5-10% in 1999 owing to lower rainfall and, with auction prices also expected to fall, real GDP growth will slow to 3.5%. A return to normal climatic conditions will allow real GDP growth to increase to 4.7% in 2001.

On the expenditure side, growth in government consumption will slow from the 1999 level, which was boosted by pre-election spending. Investment spending in 2000 will grow by 6.5% as newly privatised industries upgrade their capital stock. However, uncertainty over prices and the exchange rate will slow private consumption growth, and net trade will remain the main engine of economic growth in 2001.

Tobacco growers have expressed great concern over the low prices they received at the start of the tobacco auctions this year. However, prices have since recovered and are not far from the levels reached at the same stage of the 1999

season. With the higher-quality part of the crop now reaching the market, some of the concern over price is being alleviated, although because of the late start to the rainy season production will be lower. Prospects for other crops, especially those recently adopted as part of the government’s diversification attempts, are much brighter, and this will encourage more farmers to convert to these crops given tobacco’s uncertain long-term future. The manufacturing sector will struggle to compete, as trade barriers are lowered in the move towards regional free trade. However, the South African decision to lift its ban on Malawian textile imports when the South African Development Community (SADC) free- trade protocol comes into force should help the sector recover in 2001. But continued regional political troubles will hit tourism and, despite an expansion in the nascent financial services market, overall growth in the services sector will slow to 3.5% in 2001 from 5% in 2000.

Forecast summary (% unless otherwise indicated) 1998a 1999b 2000c 2001c Real GDP growth 3.1 4.7 3.5 4.7 Agricultural production growth 2.7 9.0 2.0 6.0 Consumer price inflation Average 29.8 44.8 28.6 23.8 Year-end 53.1 28.3 28.9 15.6 Short-term interbank rate 37.7 53.6 36.1 31.3 Government balance (% of GDP) –1.6 –1.8 –0.7 –0.5 Exports of goods fob (US$ m) 535 436 432 543 Imports of goods fob (US$ m) 580 635 683 697 Current-account balance (US$ m) –233 –415 –413 –365 % of GDP –13.8 –23.3 –21.6 –19.1 Total foreign debt (year-end; US$ bn) 2.4 2.7 3.0 3.4 Exchange rates (av) MK:US$ 31.07 44.09 54.74 70.66 MK:¥100 23.74 38.71 52.64 70.31 MK: 34.80 46.97 52.96 75.49

a Actual. b EIU estimates. c EIU forecasts. d Ecu before 1999.

Inflation Continued tight monetary policies should help reduce the rate of inflation over the forecast period. Food price inflation in 2000 will be subdued owing to the maize surplus—maize is the largest individual component of the consumer price index. However, a drop in the value of the kwacha against the US dollar will lead to growth in imported price inflation during 2000.

High international oil prices will hinder efforts to lower inflation, and if donors’ wishes and Mr Chikaonda’s plan are followed, the gradual removal of subsidies will cause further rises in the price of fuel, maize and other goods previously supported by the government. As the effect of the fall in the kwacha drops out of the annual comparisons, inflation should average 23.8% in 2001, after an average of 28.6% in 2000.

Exchange rates Lower tobacco export revenue and the fall in the South African rand will cause the kwacha to depreciate this year by over 40% against the US dollar. The pace of the depreciation of the kwacha against the US dollar slowed in July owing to an improvement in the prices fetched at the tobacco auctions. This fall has still to reflect fully the drop in the rand adjusted for inflation differentials (despite no formal link) and, with revenue from tobacco exports expected to be lower in 2000, we believe the kwacha has further to go.

The main issue is whether this slide will maintain its current pace, or whether a rapid drop in value will occur, as happened in August 1998. We are currently forecasting a reasonably steady decline during the remainder of 2000, which will accelerate once the tobacco auction season has closed in September. The exchange rate is expected to average MK54.7:US$1 in 2000, ending the year at MK65.3:US$1. In 2001, we expect the kwacha to depreciate roughly in line with inflation differentials, averaging MK70.7:US$1.

External sector Lower tobacco output and prices will reduce export revenue in 2000, while higher international oil prices will increase the import bill, lifting the trade deficit to US$251m. A reversal of these trends in 2001 should enable the trade deficit to improve to US$154m. A large deficit will remain on the services account, but continuing donor inflows will ensure a healthy surplus on the current transfers account. Overall, the current-account deficit is forecast to reach 21.6% of GDP in 2000 and drop to 19.1% of GDP in 2001.

The lower prices and the late start to the rains will ensure that export revenue from tobacco, the country’s largest source of foreign-exchange earnings, will be down on the 1999 level. However, we have revised up our tobacco price forecast and now expect export earnings from the crop to reach US$228m in 2000; overall export earnings will be US$432m. Despite the poor rainfall levels, tea production in 2000 should be marginally up on 1999, though stagnant world prices will keep export earnings in 2000, of US$39m, at their 1999 level. A return to normal rainfall in 2001 will help agricultural production to expand, and will increase total exports to US$543m. Higher prices for imported goods— the result of the expected depreciation of the kwacha—will restrain import spending throughout the economy, although an increase in international oil prices will lift the overall import bill to US$683m in 2000. In 2001 demand from newly privatised enterprises will cause imports of industrial inputs to rise, but increased exports will help the trade deficit to fall. Higher oil prices will increase transport costs, contributing to a further widening of the services deficit in 2000. The services account will worsen in 2001, even though world oil prices are expected to fall, as trade volumes—and therefore transport costs— increase. The rail link between Malawi and the Mozambican port of Nacala, which will improve access to the coast for Malawian goods, is scheduled to open in September, but much of the track needs to be improved before it will allow a significant saving on transport expenditure. Loans granted at the May CG meeting will ensure a healthy surplus on the current transfers account, even after allowing for the loss of support from Japan (due to Malawi’s entry into the IMF and World Bank’s heavily indebted poor country initiative), previously Malawi’s largest bilateral donor.

Editors: Angus Downie (editor) Editorial closing date: August 25th 2000 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule