New Malawi Economic Monitor calls for Commitment to Economic reforms to sustain the Emerging Recovery

Malawi’s medium-term growth outlook is improving because of bold reforms undertaken by the government in 2023 to stabilize the economy, although other numerous downside risks related to climate change, continued foreign exchange challenges, delays in the implementation of key macro-fiscal and structural reforms persist. Growth is therefore expected to increase only moderately in 2024, according to the latest World Bank Malawi Economic Monitor (MEM).

The World Bank’s MEM provides a semiannual analysis of Malawi’s economic and structural development issues. This 18th edition, titled Turning the Corner? acknowledges that the Government of Malawi has taken an initial set of bold actions, including the adjustment of the exchange rate, monetary tightening and commitments to enhanced fiscal prudence, which paved the way for a November 2023 agreement on an Extended Credit Facility (ECF) with the Internal Monetary Fund (IMF) and the first World Bank-funded budget support operation since 2017. However, the MEM argues that both immediate actions as well as sustained commitment will be necessary if the reforms are to bear fruits for the wider economy.

The MEM also emphasizes that key macroeconomic challenges remain, including a continued foreign exchange shortage, high inflation, and an uncertain agricultural season. The current assumptions are for growth to reach three percent in 2024, backed by a modest easing of global commodity prices, and increased output bolstered by improved foreign exchange availability, but the ongoing prolonged dry spells may threaten the 2023/24 harvest. While the fiscal deficit is projected to narrow for the first time in six years, thereby slowing uptake of domestic and external debt, Malawi’s debt levels remain high and require progress on efforts to restructure external debt and contain additional borrowing to ensure medium-term debt sustainability.

“While economic growth is projected to increase, numerous downside risks to the Malawian economy persist, most notably the ongoing El Nino phenomenon which we are concerned may exacerbate an already challenging food insecurity situation. If the economy is to turn the corner, the government must double down on key reforms, in particular, a flexible exchange rate to rebuild the country’s reserves position, and tough expenditure controls to reverse the build-up of domestic debt which currently crowds out private sector borrowing” says Hugh Riddell, World Bank Country Manager for Malawi.

The MEM includes a set of recommendations including i) bolstering macroeconomic stability by implementing announced reforms to increase exchange rate flexibility, rebuilding foreign reserves, and continuing to improve fiscal governance and sustainability; ii) creating the foundations for export-led growth by investing in agricultural commercialization, continuing reforms to the Affordable Input Program, and policy support for exporting industries; and iii) building resilience and protecting the poor through the expansion of social cash transfer and climate-smart public works projects.

This MEM’s special topic, “Healthy Watersheds for a Strong Economy”, examines the links between watershed protection and rehabilitation and economic recovery. Through the rapid conversion of land for agriculture and widespread deforestation, Malawi has seen a dramatic loss of forest cover from 47 percent in 1975 to just over 20 percent in 2021. Runoff from degraded landscapes carries soils and agrochemicals, polluting watercourses, and wetlands and is leading to a loss of soil fertility. This is proving catastrophic for the natural resources that provide the basis for the country’s economy. Investing in watershed protection and restoration activities has the potential to substantially reduce soil erosion rates, improve crop productivity, and enhance water storage.

“Healthy watersheds are essential to maintain sustainable water supply, avoid the loss of fertile soil, and protect communities from landslides and flash floods. The way Malawi’s watersheds are managed will influence the prosperity of Malawian communities today and it will determine the country’s future economic performance as it faces growing challenges from population growth and increased climate variability,” says Francis Ghesquiere, World Bank Practice Manager for Sustainable Africa East Water Region.

Distributed by APO Group on behalf of The World Bank Group.