New Economic Analysis for Malawi Forecasts Slow Growth Due to COVID-19
Malawi’s three-year trajectory of increasing economic growth has been interrupted by the global COVID-19 (Coronavirus) pandemic, but the full extent of the pandemic’s negative impact is still uncertain as the crisis unfolds, says the latest World Bank Malawi Economic Monitor (MEM).
The 11th edition of the MEM, From Crisis Response to a Strong Recovery, explains that the negative effects of COVID-19 are already being felt by the country because of the disruption in global value chains where the importation of key production inputs have been disrupted and with trade and logistics costs rising. As a result, imports declined by 26 percent in April and May. This is further impacted by a reduction of domestic demand due to increased risk aversion and social distancing policies.
According to the MEM, the second consecutive bumper harvest, combined with Malawi’s relatively small services and industry sectors, should help alleviate some of the negative impact on growth. Maize production is estimated to increase by 11.5 percent over 2019’s robust harvest, which will help assure food security in the short term.
In May and June, gross tax revenues fell by 13 percent below the third quarter. However, the impact of the crisis is expected to increase, as tax revenues are affected by the economic slowdown, while the Government will need to increase expenditure for health and economic policy responses. Yet with increasing levels of high cost domestic debt, the new Government will face limited fiscal space to respond to the health crisis, while also investing in the recovery and resilience in the medium term.
“The COVID-19 pandemic has slowed economic activity and poverty is expected to increase, particularly in urban areas. Malawi’s large informal sector increases vulnerability, while government lacks the fiscal space to respond. Despite these considerable challenges, the new government has an opportunity to signal its commitment to credible budget management, reduced reliance on high-cost domestic debt, improved oversight of State-Owned Enterprises and a stable and open environment for longer term diversification of the economy. The World Bank is pleased to be a committed partner to Malawi at this time of great challenge, and great opportunity, with projects for immediate COVID response, as well as longer term recovery and jobs.” said Hugh Riddell, World Bank Country Manager for Malawi.
In monitoring the economy, the MEM notes that Malawi’s economy grew by 4.4 percent in 2019, a marked increase from 3.5 percent in 2018 supported by a rebound in agriculture production, as maize and key crops apart from tobacco increased. Real Gross domestic Product (GDP) growth for 2020 was projected in September 2019 at 4.8 percent due to an expectation of the second consecutive year of strong harvests, offset by continuing political uncertainty weighing on business activity and investment. Growth prospects are highly uncertain as the pandemic continues to unfold, but the MEM projects growth at 2.0 percent in 2020, although there are considerable downside risks. Repeated high fiscal deficits have contributed to an accumulation of domestic debt so that Malawi’s stock of public debt remained level at 59.4 percent of GDP between 2018 and 2019, due to a decline in the stock of external debt, from 31.2 to 29.7 percent of GDP, while domestic debt increased from 28.2 to 29.7 percent of GDP.