An ambitious, but achievable macroeconomic framework

It seems Malawi is on a sound macroeconomic footing. The economy is on a rebound, with Finance, Economic Planning and Development Minister Goodall Gondwe projecting a growth rate of 6.3 percent and 5.8 percent in 2014 and 2015 respectively. It is quite a strong momentum from the 6.1 percent estimate in 2013.

The surge is even more impressive considering that output only expanded 1.9 percent in 2012—the year the triple constraints of fuel, foreign currency and foreign policy blunders nearly pushed the economy—which grew by an average of seven percent over a previous five-year period—into recession.

The drivers of this return to robust growth are the usual suspects—agriculture (the strongest pusher); manufacturing; mining and quarrying; information and communication as well as, interestingly, transport and storage.

The assumptions on which these estimates are based remain opaque to me, but there are significant risks that should make the investing community tamper optimism with caution.

First, growth in the developed world and emerging markets is weak, which could have a dampening effect on the demand of goods and services that we export there.

The stand-off between Russia and Ukraine on one hand as well as Russia and the West on the other may seem a very far away crisis, but could have devastating effects on Malawi.

Apart from the volatility in European markets the crisis has caused, the sanctions that the European Union (EU) has imposed on the Kremlin will not just hit Russia (which has already started feeling the pinch with its currency plunging to historic lows).

There are also reverse effects on the countries that have a lot of business ties with Russia

I have in mind Germany, which considers Russia an important export market for high end goods.

The sanctions, especially those that have targeted Russia’s defence and financial industry, could reverberate throughout the Eurozone as banks and firms with exposure to Moscow start catching the bug.

The point is that Malawi considers Europe an important trading partner where most of our tea, sugar and tobacco go.

Conflict induced problems in that zone could affect our exports, especially given that the euro is still very fragile.

You just have to look at Spain, France and Italy to see just how vulnerable that common economy remains.

On the domestic scene, risks to economic growth include the lagging effects of the closure of Kayelekera Uranium Mine in Karonga, which was contributing strongly to the country’s gross domestic product (GDP).

In addition, fuel prices may have eased on the global market and consequently locally—what with the gains that the Malawi kwacha has made against the United States (US) dollar and even the pound—but the geopolitics of the Middle East could always spark an oil price surge.

With the US and its allies—including major oil producers in the Middle East—officially declaring war on the Islamic State that has captured large swathes of land between Syria and Iraq—it is not hard to guess what would happen to prices as the fighting rages on and the stakes rise.

On the domestic scene, the persistently high interest rates and a return to rising inflation have the potential to hit private sector activity.

The 2014/15 national budget expects inflation to decline from the 2013 levels of 27.3 percent to 19.4 percent and 9.9 percent in 2014 and 2015, respectively.

This projected decline is being attributed to increases in agricultural production and prudent monetary policies.

With year-on-year headline inflation increasing in August to 24.5 percent from 22.3 percent in July 2014, the targets look rather ambitious.

Granted, the food situation this year is better than last year’s, which means that prices of food—that control 50 percent of Malawi’s consumer price index (CPI)—are unlikely to rise too sharply.

Yet, the budget is nursing one of the country’s highest fiscal gaps that Gondwe will partly be financed by domestic borrowing and international loans. I have noted that government is cleverly trying to fix Treasury bills rates, but I think that is an exercise in futility.

Heavy domestic borrowing has always been inflationary in Malawi. And when the kwacha inevitably starts sliding in the lean period that usually starts in October after the tobacco season—which wires in around 60 percent of total forex—the general price increases are likely to follow.

The existing huge deficits in our current account and the worsening trade imbalances will not help matters either.

The good news on this risk, however, is that the Peter Mutharika administration has taken some encouraging steps to bring in foreign investors and also encourage production for export.

These efforts could help shore up our balance of payment position in the medium to long term and must be sustained if our balance of payment position is to achieve the desired balance in the foreign currency market.

Otherwise, the macroeconomic framework as tabled looks overly ambitious, but still within our reach.