As Malawi’s economy struggles in the face of double-digit inflation among other negative indicators, two new reports have presented another bleak outlook of the economy.
The reports predict a further depreciation of the kwacha in the coming months with food inflation also expected to increase as the food deficit becomes more pronounced.
The projections are contained in Alliance Capital’s Quarterly Economic Report for the second quarter of 2016 and Mid-Year Economic Report released by Nico Asset Managers.
This is coming at a time when the World Bank also projected a slow-down in Mal aw i ’s economic growth this year to 2.6 percent, sharply contrasting the government’s 5.1 growth estimate.
Alliance Capital has further warned that the economy faces the risk of increased government borrowing in the next quarter in the event that the Malawi Revenue Authority fails to meet its revenue targets.
While previously tax revenue accounted for about 60 percent of the budget with donor grants covering 40 percent, in the 2016/2017 national budget, government expects donors to provide only 19.7 percent of
the resources required for the implementation of the K965.2 billion budget while K708.8 billion will be sourced from taxes collected within the country.
And government is banking on the Malawi Revenue Authority to enhance domestic resource
mobilization which is critical to the successful implementation of the financial plan.
But Alliance Capital predicts that the pressure to execute the budget will force interest rates to go even further up, a situation that will make the cost of financing loans in Malawi become even higher.
As it stands, bank interests are hovering around 40 percent.
“The picture does not look so good considering that fy2016/17 budget will predominantly be financed from within. That means we will continue to see elevated interest rates. As the tobacco market slowly loses momentum coupled wi th government’s preparation for the coming growing season by importing inputs, a further depreciation is inevitable. It becomes more frightening if we consider the fact that food prices are steadily increasing, more so when the food deficit becomes more and more prominent as we go in the year. All that will in turn necessitate further tightening of monetary policy and keep benchmark interest rates elevated.
The firm also projects that Malawi will suffer effects on trade after Britain voted to leave the European Union.
Alliance Capital says while it is quite difficult to ascertain the extent of the impact, the firm says it expects any rattling of the UK economy to be passed on to Malawi through South Africa.
“One thing is clear; Malawi will suffer mainly in trade and not in aid in both direct and indirect ways, however, the extent is quite difficult to ascertain and subject to debate. It is believed that as high as 30 percent worth of FDI UK makes in Africa is in South Africa alone. Meaning that any rattling of the UK economy will be passed on to Malawi through South Africa, our main regional trade partner,” the firm said in the report.
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