RESTRICTED FIDE COPY Report No. AF-68a Public Disclosure Authorized This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized CURRENT ECONOMIC POSITION AND PROSPECTS OF MALAWI Public Disclosure Authorized November 20, 1967 \ Public Disclosure Authorized Africa Department /0 CURRENCY EQUIVALENTS Currency Unit - Malawi Pound (ML) US$1 = ME 0. 357 US$ 1 million = ML 357, 143 ME 1= US$ 2.80 ME 1 million = US$2, 800, 000 This report was prepared by a Mission which visited Malawi in IMay-June 1967, consisting of Messrs. John A. Edelman, Paul Chen-Young, Attila Karaosmanoglu and John Scott. TABLE OF CONTENTS Page No. BASIC DATA i SU1MARY AND CONCLUSIONS iv I. RECENT ECONOMIC DEVELOPIENTS 1 Introduction 1 Trends in Production 2 Exports 5 Imports and National Expenditure 5 Capital Inflow and. Domestic Savings 7 Trends in Public Sector Finance 8 Monetary Developments and the Overall Financial Situation 12 II. DEVELOPIJENT PROBLEMS AND PROSPECTS 14 Introduction 14 The M4ain Productilre Sectors 16 .Agriculture 16 Manufacturing and Mining 18 Invisible Earnings Prospects 19 Summary of Output and Exports Prospects 20 The Main InfrastrTLctural Sectors 21 Transport 21 Power 22 Education and Health 22 Housing and Government Building 23 Overall Investment Prospects 23 III, PROSPECTS FOR NATIONAL EXPENDITURE AND FINANTCE 25 National Expenditure, Savings and Imports 25 The Outlook for Public Saving and Finance 26 The Need for Local Currency Financing 31 The Overall Outlook for External Finance and the Terms of Aid 32 IV. STATISTICAL APPENDIX Tables 1 - 32A Map of Malawi BASIC DATA ON THE MAIAWI ECONOMY AREA Including lakes 45,747 sq. miles Land area 36,448 sq. miles Iand suitable for cultivation 20,491 sq. miles FOPUIATION Mid-1966 Total in country 4,042,412 Migrant labor working abroad 270,000 Ilon-African population 17,926 Estimated annual average growth rate 3 percent Urban population (as percentage of total population) 5 percent 1955 1960 1966 Density of population per square mile 77 90 111 Per square mile of land suitable for cultivation 137 161 197 GROSS DOYIESTIC PRODUCT Real Growth Rates % £M 1954-61 1961-64 1964-66 1966 Gross domestic product at factor cost 4.6 1.2 12.6 69.7 Monetary sectors 6.1 -0.4 19.5 41.0 Subsistence 3.0 3.0 3.0 28.7 Per capita GDP $52 DISTRIBUTION BY BRANCH % 1955 1960 1964 1966 Commercial smallholder agriculture 5.6 6.2 7.4 8.6 Estate agriculture 8.9 8.8 5.6 5.7 Manufacturing, construction and utilities 7.8 9.7 8.3 11.0 Transport and communications 4.1 4.8 4.5 6.2 Other monetary sectors 19.6 23.4 25.3 27.2 Monetary economy 46.o 52.9 51.1 58.7 Subsistence economy 54.0 47.1 48.9 41.3 INVESTMENT AND SAVINGS (percent of GDP at market prices) 1964 1966 Gross investment 7.7 20.2 public fixed 6.0 9.5 private fixed 4.3 8.0 stock changes -2.6 2.7 Gross domestic savings -2.0 2.6 Gross national savings (as percentage -1.2 1.8 of GNP at market prices) RESOURCE GAP As a percentage of investment 126.6 86.8 FINANCE OF GROSS INVESTMENT (percentage of groas investment) National savings -20.0 8.6 Public -73.3 -15.2 Private 53.3 23.8 Balance of payments 120.0 91.4 MONEY, CREDIT AND PRICES M4id-67 Annual increase % DEid-65 - Mid-66 Ni d-66 - Total money supply 19.7 11.2 IIoney 19.6 11.0 Quasi-money 22.3 17.7 Bank credit, outstanding to private sector 28.9 30.4 CONSUMER PRICE INDICES (January) 1962 1963 1964 1965 1966 1967 8 High income index 100 102.5 108.4 111.1 .. 11 .9(April) Low income index .. .. .. 101.4 96.9 100 PUBLIC SECTOR OPERATIONS (percentage of GDP at current market prices) 1962/63 1964 1966 Central Government Current receipts 12.1 12.9 14.9 Current expenditure 22.8 20.0 19.5 Current savings -10.7 -7.1 -4.6 Development expenditure .. 4.1 7.8 External assistance 15.5 12.0 Government Enterprises Current savings .. 1.7 1.7 Development expenditure .. 2.5 2.4 External assistance .. 1.0 0.8 Total Public Sector Current savings .. -5.4 -2.9 Development; expenditure .. 6.6 10.2 External assistance .. 16.5 12.8 BAIIACE OF PAYMENTS £ m. 1960 1964 1966 Exports .. 12.1 15.6 Ile rchandise 9.3 11.0 13.7 Non-factor services 1.1 1.9 Imports 17.8 28.7 Merchandise 11.4 13.5 23.8 Non-factor services 4.3 4.9 Balance on Goods and Services .. -5.7 -13.1 Net Factor Income Payments .. +0.3 -0.7 Deficit (on current account excluding transfers) .. -5.4 -13.8 Total net transfers received .. 6.1 6.5 Private .. -O.6 0.3 Government .. 6.7 6.2 (iv) EXTERNAL TRADE 1960 1964 1966 las percentage of GDP at factor cost) Mlerchandise exports 18.0 19.9 19.7 Merchandise imports 22.4 25.9 38.6 Concentration of merchandise exports 79 69 66 -(tea and tobacco as percentage of total) 1954/57 - 1962/65 1964-66 Annual average growth rate Mqerchandise exports 63 11.6 Mlerchandise imports 2:7a/ 32.7 aL/ 1957-64 INTERNATIONYLL RESERVES 1965 1966 l'otal value £M 9.9 7.3 Nionths' imports of goods and services 6.7 3.1 I1MF POSITIOT Quota $14 11.25 11.25 Drawings - gross nil nil EXTERNAL PUBLIC DEBT l'otal debt outstanding $M December 1966 Nlet of undisbursed 69.8 Including uidisbursed 90.6 Debt service ratio (1966 debt service as percentage of exports of goods and services) 9.6 (v) Summwry and Conclusions 1. Since its Independence in 1964, Malawi's growth in output and investment has been impressive. During the three years 1965-67, total production has averaged one-third above the level of the previous three year period. This is explained partly by improved weather for agriculture, but mainly by improved political conditions following an uneasy situation 'which characterized the period just prior to and just after Independence. With the resolution of these difficulties, confidence of the private sector recovered sharply during l965, while expanded government develop- rent efforts helped to evoke a substantial increase in response from the farmers. Total investment recovered from a low point of 8 percent of GDP Ln 1964 to a peak of 20 percent in 1966, reflecting both important swings in inventories and a large rise in private and public fixed capital form- ation. During 1967 the economic situation has been less buoyant than the iprevious two years, but the main dynamic elements continue to be in evidence. 2. Nevertheless, the basic situation of Malawi remains quite difficult. Despite large increases in per capita income in the past three years, the level remains among the lowest in the world -- around $55 per head. No large mineral resources are available for quick exploitation. One-fourth of the male labor force is employed outside the country, but it is doubtful that any large expansion can be achieved in this source of employment over the long term. The main potential for growth lies in agri- culture where the volume of commercial output has grown by six percent annually over the past decade, with a marked acceleration in recent years. Even here, an important long-run problem is posed by the relationship between the size of' the population, which is growing at around 3 percent annually, and the comnparatively modest amount of good farming land which still remains uncultivated. However, there are good possibilities for increasing yields. There is also a potential for expansion of the very small manufacturing sector, mainly for import substitution, but possibly also for export in some lines, Moreover, some prospects exist for expanding external earnings from tourism and transit trade. These possibilities, together with the progress actually achieved in the recent past, suggest that Malawi can maintain a healthy rate of economic expansion in the years ahead. Assuming that efficient administration is maintained, export growth of around 7 per- cent annually would seem feasible over the next decade, while total output could well expand at a 6 percent rate. 3. However, to achieve such growth rates will require continued large amounts of external aid and prudent economic management by the Malawi Government, particularly of external aid and of its limited domestic re- sources, including its foreign assets. There are indications that the latter were being utilized during 1966 and 1967 at rates which cannot be sustained for long without leading to foreign exchange difficulties. 4. With domestic savings averaging only about 2 percent of GDP during 1965 and 1966, the high rate of investment in those years led to a current balance of payments deficit corresponding to about 17 percent of GDP. During 1965, the deficit was more than covered by public foreign grants and loans, and foreign exchange reserves rose to the equivalent of (vi) over 4 months' imports of goods and services. However, in 1966 a decline in external assistance was accompanied by a large increase in use of local f'inancial resources including large borrowings from the banking system, with the result that exchange reserves dropped by about f2.7 million, or over one-quarter the end 1965 level.