The Economy of Malawi

Walani Ndhlovu By Walani Ndhlovu, 21st Jan 2016 | Follow this author | RSS Feed
Posted in Wikinut>Business>Analysis

This article is intended to elaborate the challenge faced by the economy of Malawi, a developing country in central Africa.

Why is the Economic Circumstance of Malawi Challenging?

Malawi is in a severe economic hardship. The majority of its residents are affected by the rising costs of goods and services which is virtually corresponding to the decrease in the value of their wages. To understand the complexity of Malawi’s economic circumstance, two ideas with contrary approaches need to be elaborated; economic independence and recession.

In 2015, the World Bank reported that Malawi had the lowest GDP in the world. Despite the controversy of validity of this statement, the rank does not really matter but the certainty that Malawi’s GDP is significantly low. From the light of this fact, it is clearly evident that Malawi is in a recession. Possibly, the recent decrease in tobacco prices is likely to have exposed the recession since tobacco is the major cash crop in the country. The analysis of the causes of the recession is however beyond the scope of this article. Essentially, economic studies assure that one of the solutions towards recession is decreasing taxes and interests, a pretty much straight forward fact. Since the GDP is a measure of the economic activity usually derived from income of firms and individuals, lowering taxes and interests optimizes the consumption of goods and utilization of services thereby boosting economic activities.

Economic independence, on the other hand, has a contrary solution. Conceptually, economic independence is aimed at reducing the amount of foreign aid by generating a rigid economy from the dwellers. This blatantly involves the collection of higher taxes and interests rates to provide the government with sufficient funding for national services. However based on economic models, imposing taxes and interests eradicates some of the transactions that should normally be occurring if taxes were not imposed. This leaves Malawi in a dilemma; should it conquer the recession or strive for economic independence?

The answer to that question is not as simple as pointing at one or the other though. The consequences of each choice have to be carefully analysed. If the government chooses to tackle the recession, it risks to suffer from the consequences that may occur when foreign countries abruptly cease to provide aid. Alternatively, prioritising economic independence will lead to severe poverty in short term as firms will limit the amount of labor to maximize profit and some individuals won’t financially afford to sustain their lives. So far, the government has been fluctuating from one option to the other unsystematically which is potentially why the country retains the economic burden. For instance, the suggestion for secondary school fees hike was an approach towards economic independence. After critical analysis of the unjust feasibility of the this activity, the Ministry of Education decided to postpone the implementation of act until the economy is stable; thus the Ministry of Education prioritized the approach against recession.

As suggested by the World Bank, Malawi needs to strategically employ aspects of both eliminating recession and economic independence. Malawi Economic Monitor: Inaugural Economic Report Provides Economic Analysis, Recommendations, a featured article on the world bank website states, “With Malawi facing significant economic challenges in 2015, a key priority for the government will be to take steps to restore macroeconomic stability and rebuild confidence in the economy.” Zooming into macroeconomic stability enables the visualization of strategies employed against recession such as low inflation and low interests rates. At the same time, macroeconomic stability also adopts strategies of economic independence such as low deficits, low debts and currency stability. Therefore, the best way for Malawi to maximize productivity is to apply anti-recession strategies within its national economic activities and to apply economic independence strategies on the international scale such as on exports.

Stagflation in Malawi

It is clear that Malawi is striving towards economic growth through the expansionary fiscal and monetary policies as well as the 2015 Kwacha currency devaluation. The government has been increasing agricultural subsidies while reducing taxes on technical equipment to increase aggregate demand. As quoted in the Nyasa Times, the minister of finance, Goodall Gondwe said, “For new motor vehicle up to 8 years old, excise duty will be reduced from 55 percent to 40 percent.” This shows the government’s incentive to increase consumption thereby increasing the real gross domestic product. According to the Reserve Bank of Malawi in their Statement of the 1st Monetary Policy Committee Meeting For 2016,the Monetary Policy Committee decided to maintain the Policy rate at 27.0 percent and the Liquidity Reserve Requirement at 7.5 percent. The low reserve ratio would increase investment due to lower interest rates therefore increasing the aggregate demand. Kwacha currency devaluation alternatively was aimed at increasing net exports for economic growth. Typically, all these expansionary policies are solutions to a recession. But is Malawi in a recession?

Many people classify the economic state of Malawi as an inflation not a recession. The rising price levels and inflation tax are blatant evidence to support their claim. In fact even the Reserve Bank is aware of the inflation. In their February 2016 statement, the monetary policy committee reported that, “The Committee welcomed the slowdown in inflation in January 2016 to 23.5 percent.” Despite their expansionary actions, this contractionary response was great news to them. Why didn’t they implement contractionary policies if they wanted contractionary results? Well, it’s because Malawi is not simply in a regular inflation; it is in a stagflation, an economic state that incorporates both the aspects on recession and inflation.

Stagflation is when the economy operates in a recessionary gap under high price levels. It is caused by negative supply shocks such as increase in costs of inputs and devastating natural disasters. Therefore, it is logical to conclude that the regular droughts and floods in Malawi reduce the aggregate supply of goods hence reducing the national income, a typical stagflation. In the report called Economic Losses and Poverty Effects of Droughts and Floods in Malawi, the International Food Policy Research Institute wrote, “Agriculture suffers the greatest losses, with declines in GDP ranging from 1.1 to 21.5 percent during RP5 and RP25 droughts respectively.” Since Malawi primarily depends on agriculture the aggregate supply is significantly affected. Another sign of the presence of stagflation in Malawi is the comparison between inflation rate and unemployment rate. Normally these two concepts have an inverse relationship. However, both inflation and unemployment rates are very high in Malawi which portrays that the country is in a stagflation.

Unfortunately, both fiscal and monetary policies cannot regulate stagflation; the government and the central bank can only manipulate the aggregate demand not the aggregate supply. They cannot implement contractionary policies to conquer inflation because that would decrease, the already low, GDP. Implementing expansionary policies to get rid of the stagflation will greatly increase inflation. The solutions to stagflation are rather long term and complex that many countries choose to tolerate the inflation; hence why Malawi implements expansionary policies.

Tags

Economic Crisis, Malawi

Meet the author

author avatar Walani Ndhlovu
Born and raised in his country, Malawi, Walani graduated at Mzuzu International Academy and attended a high school PG year at Taft school in Connecticut. His writing is a reflection of Africa.

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author avatar SaigonDeManila
30th May 2016 (#)

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