Malawi: The warm heart of Africa!

From Malawi360

Overview

Malawi is a landlocked, densely populated country. Its economy is heavily dependent on agriculture. Malawi has few exploitable mineral resources. Its two most important export crops are tobacco and tea. Traditionally Malawi has been self-sufficient in its staple food, maize, and during the 1980s exported substantial quantities to its drought-stricken neighbours. Agriculture represents 34.7% of the GDP and represents about 80% of all exports. Nearly 90% of the population engages in subsistence farming. Smallholder farmers produce a variety of crops, including maize (corn), beans, rice, cassava, tobacco, and groundnuts (peanuts).The agricultural sector contributes about 63.7% of total income for the rural population, 65% of manufacturing sector's raw materials, and approximately 87% of total employment. Financial wealth is generally concentrated in the hands of a small elite. Malawi's manufacturing industries are situated around the city of Blantyre.

Agriculture and Industry

Malawi's economic reliance on the export of agricultural commodities renders it particularly vulnerable to external shocks such as declining terms of trade and drought. High transport costs, which can comprise over 30% of its total import bill, constitute a serious impediment to economic development and trade. Malawi must import all its fuel products. Paucity of skilled labour; difficulty in obtaining expatriate employment permits; bureaucratic red tape; corruption; and inadequate and deteriorating road, electricity, water, and telecommunications infrastructure further hinder economic development in Malawi. However, recent government initiatives targeting improvements in the road infrastructure, together with private sector participation in railway and telecommunications, have begun to render the investment environment more attractive.

Structural Adjustment

Malawi has undertaken economic structural adjustment programs supported by the World Bank, the International Monetary Fund (IMF), and other donors since 1981. Broad reform objectives include stimulation of private sector activity and participation through the elimination of price controls and industrial licensing, liberalization of trade and foreign exchange, rationalization of taxes, privatisation of state-owned enterprises, and civil service reform.

Economic Performance

In May 2004, the IMF program begun in 2000 was cancelled and a Staff-Monitored Program (SMP) was implemented. In the wake of questions about fiscal creditability, the SMP's goal was to give Malawi's newly-elected government the chance to establish a track record of fiscal discipline. A Poverty Reduction and Growth Facility (PRGF) was approved on August 5, 2005 after a successful SMP. In August 2006 Malawi successfully reached the completion point under the Heavily Indebted Poor Countries (HIPC) Initiative, resulting in debt relief from multilateral and Paris Club creditors. Over $2 billion in debt has since been cancelled, enabling the government to increase expenditures for development. Real GDP increased by an estimated 7.4% in 2007, a modest decline from 7.9% in 2006. Inflation has been largely under control since 2003, averaging 10% in that year and 7% in 2007. Discount and commercial lending rates have also declined from 40%-45% in 2003 to 22.5% currently. The government has moved away from controlling the exchange rate, allowing the Kwacha to drift since down since March 2005. As of January 2008 the Kwacha had depreciated to 140 to the U.S. dollar. Nevertheless, imports still heavily outweigh exports, and the country continues to suffer from a severe shortage of foreign exchange.

Trade Agreements

Malawi has bilateral trade agreements with its two major trading partners, South Africa and Zimbabwe, both of which allow duty-free entry of Malawian products into their countries.