Country Report Malawi Malawi at a glance: 2006-07 OVERVIEW The president, Bingu wa Mutharika, is expected to remain in office over the forecast period, although his support in parliament is likely to remain tenuous, owing to the ongoing power struggle with his predecessor, Bakili Muluzi. Economic policy will continue to be guided by the current IMF-prescribed poverty reduction and growth facility (PRGF), which is expected to remain on track. Malawi should reach completion point under the IMF-World Bank's heavily indebted poor countries (HIPC) debt-relief initiative in the second half of 2006, and also to become eligible for debt relief from the IMF and other multilateral creditors under the Multilateral Debt Relief Initiative (MDRI) in the forecast period. Economic growth will continue to be strongly influenced by the performance of the agricultural sector, given the lack of economic diversification and of exploitable natural resources. Reduced pressure on food supplies is expected to help to bring the average rate of inflation down from 15.4% in 2005 to 15.3% in 2006 and 13% in 2007. A recovery in exports, together with higher donor inflows, is expected to result in a narrowing of the current- account deficit from an estimated 11.2% of GDP in 2005 to 9% of GDP in 2006 and 6.1% of GDP in 2007. Key changes from last month Political outlook • Recent tributes by Mr Mutharika to the Zimbabwean president, Robert Mugabe, and the late former president of Malawi, Hastings Banda, have caused controversy in Malawi and may have undermined the president's ability to increase his small support base. Economic policy outlook • The 2006/07 (July-June) budget announced on June 16th proposes a strong emphasis on improving the ability of the agriculture sector to cope with drought, with a substantial allocation of funds to the ministries of agriculture and food security and of irrigation and water development. The Reserve Bank of Malawi has adopted a managed float, which it hopes will help to ease the management of the exchange rate. Economic forecast • There have been no changes to the Economist Intelligence Unit's economic forecast from last month. July 2006 The Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ 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. The Economist Intelligence Unit delivers its information in four ways: through its digital portfolio, where the latest analysis is updated daily; through printed subscription products ranging from newsletters to annual reference works; through research reports; and by organising seminars and presentations. The firm is a member of The Economist Group. London New York Hong Kong The Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit 26 Red Lion Square The Economist Building 60/F, Central Plaza London 111 West 57th Street 18 Harbour Road WC1R 4HQ New York Wanchai United Kingdom NY 10019, US Hong Kong Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7576 8500 Fax: (1.212) 586 0248 Fax: (852) 2802 7638 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Website: www.eiu.com Electronic delivery This publication can be viewed by subscribing online at www.store.eiu.com Reports are also available in various other electronic formats, such as CD-ROM, Lotus Notes, online databases and as direct feeds to corporate intranets. For further information, please contact your nearest Economist Intelligence Unit office Copyright © 2006 The Economist Intelligence Unit Limited. All rights reserved. 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Malawi 1 Contents Malawi 3 Summary 4 Political structure 5 Economic structure 5 Annual indicators 6 Quarterly indicators 7 Outlook for 2006-07 7 Political outlook 8 Economic policy outlook 10 Economic forecast 13 The political scene 17 Economic policy 20 The domestic economy 20 Economic trends 21 Agriculture 24 Foreign trade and payments List of tables 10 International assumptions summary 12 Forecast summary 15 Key changes in the Malawian cabinet 21 Average inflation 21 The kwacha's path against its major trading currencies 23 Comparison of regional harvests 24 Balance of payments 26 Malawi's trade with the US List of figures 12 Gross domestic product 12 Consumer price inflation 26 Total external debt stock, April 2006 Country Report July 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 Malawi 3 Malawi July 2006 Summary Outlook for 2006-07 The president, Bingu wa Mutharika, is expected to remain in office over the forecast period, although his support in parliament will remain tenuous. With the help of pressure from various internal and external organisations, he is expected to be able to gain sufficient support to pass key reforms, as well as the 2006/07 (July-June) budget by the end of July. Economic policy will continue to be guided by the current poverty reduction and growth facility (PRGF) with the IMF, which is expected to remain on track. Continued recovery in agriculture is expected to drive higher overall economic growth over the forecast period. Reduced pressure on food supplies is expected to help to ease the average rate of inflation to 15.3% in 2006 and 13% in 2007. A recovery in exports, together with higher donor inflows, is expected to result in a narrowing of the current- account deficit from an estimated 11.2% of GDP in 2005 to 9% of GDP in 2006 and 6.1% of GDP in 2007. The political scene The vice-president, Cassim Chilumpha, has been arrested on charges of treason. The attorney-general, Ralph Kasambara, who had been advising the president in his dealings with Mr Chilumpha, has been sacked. Mr Mutharika has reshuffled his cabinet and appointed three senior opposition members. The government has warned that local elections may not be held until 2007. Tributes by Mr Mutharika to the Zimbabwean president, Robert Mugabe, and the late former president, Hastings Banda, have caused controversy in Malawi. Economic policy The finance minister, Goodall Gondwe, has announced the 2006/07 budget, which includes a strong focus on agriculture, food security and water, in order to improve the country's ability to cope with persistent drought. The budget has also proposed a number of tax cuts, to make Malawi's business climate more competitive. The Reserve Bank of Malawi (the central bank) has adopted a managed float, to ease the management of the exchange rate. The domestic economy Inflation has edged downwards, but fuel price increases of between 3% and 7% were announced in May. The kwacha has depreciated rapidly in the first half of the year, following the removal of restrictions imposed on foreign-exchange transactions. The Ministry of Agriculture and Food Security has estimated that the 2006 maize crop will be sufficient to meet domestic needs. Foreign trade and payments According to the central bank, the current-account deficit increased in 2005, alongside a widening trade deficit, owing to drought-related imports. Editors: Nicola Prins (editor); Pratibha Thaker (consulting editor) Editorial closing date: June 30th 2006 All queries: Tel: (44.20) 7576 8000 E-mail: [email protected] Next report: Full schedule on www.eiu.com/schedule Country Report July 2006 www.eiu.com © The Economist Intelligence Unit Limited 2006 4 Malawi Political structure Official name Republic of Malawi Form of state Unitary republic Legal system Based on English common law; constitution promulgated in May 1995 National legislature National Assembly of 193 seats, elected by direct universal suffrage for a five-year term National elections May 2004 (presidential and legislative); next elections due by May 2009 (presidential and legislative) Head of state President, elected by direct universal suffrage for a term of five years; Bingu wa Mutharika was elected in May 2004 National government Cabinet, chaired by the president; a new cabinet was named in June 2004 following the May election Political parties The Malawi Congress Party (MCP) is the largest single party in the National Assembly and the second largest is the United Democratic Front (UDF); smaller parties include the People's Progressive Movement, the Congress for National Unity, the People's Transformation Party, the Republican Party, the Alliance for Democracy (Aford), the National Democratic Alliance (NDA) and the Movement for Genuine Democratic Change (Mgode); independent members of parliament currently form the third largest bloc in the legislature; Mr Mutharika has formed the Democratic Progressive Party (DPP) President & commander-in-chief of the armed forces, minister of civil service