Portfolio and investment advisory management firm Nico Asset Managers Limited has outlined four risks that could stand in the way of Malawi’s economic growth and development.
The firm, in its July 2015 monthly economic brief, has mentioned banking sector risk, weak export base, increased government expenditure and high debt levels [foreign and domestic] as likely risks to the economy in the short to medium term, which could have an impact on real gross domestic product (GDP) growth estimated at 5.4 percent this year.
Economic analysts agree that the Malawi economy is going through a rough patch characterised by high interest and inflation rates, a depreciating kwacha, poor tobacco prices and revenue and poor social service delivery.
On banking sector risk, Nico Asset Managers, a wholly owned subsidiary of Malawi Stock Exchange (MSE)-listed Nico Holdings Limited, said high interest rates may result in slow down in private sector growth and a decrease in capital investments.
“High interest rates may also lead to high default rates on loan facilities and lower private sector activity,” said the firm.
Two weeks ago, the Reserve Bank of Malawi (RBM) revised downwards the Liquidity Reserve Requirement (LRR) ratio—a portion of customers’ reserves that commercial banks keep with RBM at no interest—from 15.5 percent to 7.5 percent, which has compelled commercial banks to reduce base lending rates.
Most commercial banks have reduced their base lending rates to 32 or 33 percent from a previous range of 37 and 39.5 percent. Interest rates on the interbank market have also gone down.
Nico Asset Managers said a weak export base would likely affect the kwacha’s stability against major trading currencies as the value of imports far exceeds the value of exports, resulting in higher demand for foreign currency than the available supply.
Increased government expenditure as a risk to the economy has the potential to swell government borrowing; hence, widening the fiscal deficit. The firm said government support to flood victims in 15 of the country’s 28 districts will result in increased government spending further widening the deficit.
Nico Asset Managers also said high debt levels create a future obligation for government to repay the debt plus interest.
The firm’s figures show that as at March 31 2015, domestic debt was recorded at K433.9 billion while foreign debt totaled K772.3 billion ($1.7 billion). It said long-term debt results in higher levels of repayable interest which increases government expenditure and widens budget deficit.
In an interview on Thursday, Minister of Finance, Economic Planning and Development Goodall Gondwe conceded that the economy is sailing in troubled waters.
“We have had a lot of shocks; our donors are no longer with us, our tobacco did not do well and the kwacha is depreciating,” he said. n