Country Report October 2003 Malawi Malawi at a glance: 2004-05 OVERVIEW The Economist Intelligence Unit has now extended its forecast period into 2005. The ruling United Democratic Front (UDF) is best placed to win both the presidential and legislative elections, scheduled for May 2004, owing to its strong nationwide organisation and its alliance with the Alliance for Democracy. Divisions within the party over Bingu wa Mutharika’s nomination as presidential candidate are unlikely to weaken its electoral chances. Assuming a good harvest of maize and other crops, real GDP growth should increase to 2.6% in 2004; falling tobacco receipts will bring this down to 2.3% in 2005. Key changes from last month Political outlook • Mr Mutharika will be unlikely to risk deviating from Mr Muluzi’s wishes too much in 2004-05. After the elections, the essentially self-serving nature of Malawian politics is unlikely to change. Economic policy outlook • Our economic policy forecast remains largely unchanged. After the elections in 2004, we expect the government’s commitment to improving fiscal discipline to increase slightly; therefore, we are forecasting that the fiscal deficit will narrow to 5.5% of GDP in fiscal year 2004/05 (July-June) and 5% of GDP in 2005/06. Economic forecast • We have extended our forecast period to 2004-05 this month. The depreciation of the kwacha and higher government spending ahead of the presidential and legislative elections will push average inflation up to 13% in 2004. The lack of election-related spending should bring average inflation down to 12.2% in 2005. We expect the kwacha to depreciate from an average of MK98.3:US$1 in 2003 to MK120.2:US$1 in 2004 and MK132.3:US$1 in 2005, as the lack of steady foreign-exchange flows exerts downward pressure on the currency. • Slower import growth and higher tobacco exports will cause the current- account deficit to narrow to 9.2% of GDP in 2004; higher donor inflows will result in a further narrowing of the deficit to 8.3% of GDP in 2005. October 2003 The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom The Economist Intelligence Unit The Economist Intelligence Unit is a specialist publisher serving companies establishing and managing operations across national borders. For over 50 years it has been a source of information on business developments, economic and political trends, government regulations and corporate practice worldwide. 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Malawi 1 Contents 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2004-05 7 Political outlook 8 Economic policy outlook 9 Economic forecast 12 The political scene 17 Economic policy 20 The domestic economy 20 Economic trends 21 Agriculture 25 Mining 25 Industry 26 Financial services 26 Foreign trade and payments List of tables 9 International assumptions summary 11 Forecast summary 18 Government finances 26 US imports, total and under AGOA List of figures 12 Gross domestic product 12 Consumer price inflation 21 Price and wage inflation 23 Maize production 26 Foreign-exchange reserves Country Report October 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 Malawi 3 Summary October 2003 Outlook for 2004-05 The ruling United Democratic Front (UDF) is best placed to win both the presidential and legislative elections, scheduled for May 2004, owing to its strong nationwide organisation and its alliance with the Alliance for Democracy (Aford). Bingu Wa Mutharika, the UDF’s presidential candidate, will be unlikely to risk deviating too much from Mr Muluzi’s wishes in 2004-05. After the election, the essentially self-serving nature of Malawian politics is unlikely to change. Assuming a good harvest of maize and other crops, real GDP growth should increase to 2.6% in 2004; falling tobacco receipts will bring this down to 2.3% in 2005. The depreciating kwacha and higher government spending ahead of the 2004 elections will push average inflation up to 13% in 2004 from 11.6% in 2003. Once the elections have passed, inflation should fall back to average 12.2% in 2005. Slower import growth and higher exports will cause the current-account deficit narrow to around 9.2% of GDP in 2004; higher donor inflows will bring the deficit down to 8.3% of GP in 2005. The political scene Bingu Wa Mutharika has been chosen as the UDF’s presidential candidate for the 2004 election. At one point the finance minister, Friday Jumbe, appeared to have put his name forward for the nomination. Arrangements have been made for Mr Muluzi to remain party chairman after he steps down as national president. The issue of a third presidential term is still alive. The UDF has begun election campaigning. John Tembo has been disqualified from running in the 2004 election. Dissident Aford members have formed a new party. The government has suffered embarrassment over the arrest of al-Qaida suspects. Economic policy The budget for fiscal year 2003/04 (July-June) has been announced and relies on renewed donor support. Implementation will be key to the success of the budget. The government has resolved the disputes delaying the David Whitehead privatisation and this is now expected to go ahead. The domestic economy Low tobacco revenue has caused the kwacha to slump. The downward trend in inflation has been reversed. Diversification efforts have made little progress. Smallholders have been encouraged to grow macadamia trees. Maize production was up by 26% on 2001/02 in 2002/03; prospects for the 2003/04 harvest appear less promising. Tea production was up by 8.2% and a record sugar crop has been reported for 2002/03. The government is still pushing the development of the mining sector. The Portland cement quarry has closed. Foreign trade and payments Foreign-exchange reserves have declined owing to poor performance at the tobacco auctions. Textile exports to the US under the Africa Growth and Opportunity Act have increased in the first half of 2003 compared with the first half of 2002. Editors: Christopher Eads (editor); Angus Downie (consulting editor) Editorial closing date: September 24th 2003 All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report October 2003 www.eiu.com © The Economist Intelligence Unit Limited 2003 4 Malawi Political structure Official name Republic of Malawi Form of state Unitary republic Legal system Based on English common law and the constitution, promulgated in May 1995 National legislature National Assembly of 193 seats, elected by direct universal suffrage for a five-year term National elections June 15th 1999 (presidential and legislative); next elections due by June 2004 (presidential and legislative) Head of state President, elected by direct universal suffrage for a term of five years; Bakili Muluzi was re- elected for a second and constitutionally final term in June 1999 National government Cabinet, chaired by the president; a new cabinet was named on November 5th 2000 and was last reshuffled in April 2003 Political parties United Democratic Front (UDF), the largest single party in the National Assembly; Malawi Congress Party (MCP), the main opposition party; Alliance for Democracy (Aford), Malawi’s third party. Smaller parties not represented in the National Assembly include: the Malawi Democratic Party (MDP); Malawi National Democratic Party (MNDP); Mass Movement for the Young Generation (MM); National Unity Party (NUP); National Patriotic Front (NPF); United Front for Multiparty Democracy (UFMD) President & commander-in-chief of the armed forces Bakili Muluzi