Trapped under a bleeding economy

When spiders unite, they can tie up a lion. This is a popular saying which President Peter Mutharika quoted last month in Mangochi when he addressed the Economic Association of Malawi (Ecama) Annual Lakeshore Conference, to emphasise the need for unity.

Tellingly, the first citizen-who said this in the context of the ills of the domestic economy-was simply admitting that the economy, under his watch, is bleeding from all angles and from head to toe, but if united the country can turn things around.

The ‘lion’ in the room from Mutharika’s perspective is soaring inflation.

Plainly, it was a wise man’s admission that soaring inflation—the general rise in the average prices of basic goods and services—is the greatest enemy of the people of Malawi at the moment.

A week later, Reserve Bank of Malawi (RBM) Governor Charles Chuka also found himself grumbling about this monster that is eating into the purchasing power of many average income earners.

“Inflation robs the people of the fruits of their hard labour as well as jobs for their children,” he said when he addressed an economic symposium marking the commemoration of RBM’s 50th Anniversary in Lilongwe.

Chuka and team are tasked to tame inflation.

For Chuka, as governor of the central bank, is by law the big spider tasked to tame the lion.

Both Mutharika and the RBM boss seem to agree one common fact, the economy is bleeding and needs spiders to join hands to fix the ailing economy.

And even Chuka says as RBM commemorates 50 years of central banking in Malawi, their celebratory mood is rather muted.

“How can we celebrate in song and dance when basic commodity prices keep on rising? And when interest rates are as high as 42 percent?” he questions.

Prevailing high inflation and interest rates on the market are but a few key macroeconomic indicators that have trapped Malawians six feet under, creating a weak private sector investment atmosphere and a slowdown in household consumption, pulling down economic growth rates down in the process.

Indisputably, Malawi’s short-term growth prospects have deteriorated remarkedly, perhaps for the large part of the year 2015.

Experts say the current situation is due to a combination of weather shocks, increased instability in key macroeconomic variables, and a decline in business confidence, among others.

Economy in the red

The financial year 2015/16 budget was premised on a real gross domestic product (GDP) growth rate of 5.4 percent, an average inflation rate of 16.4 percent, and on an exchange rate of K450 to the dollar. That was framed somewhere in June, 2015.

Today, six months ahead, in terms of all three indicators, their conditions have worsened than expected.

The rate of inflation seems set to continue piecing into the fresh of monetary policy authorities.

At 24.7 in the month of October, the rate seem to be set to remain stubbornly high in double digits, at least for some time to come.

Even the International Monetary Fund (IMF’s) sister institution, the World Bank is in total agreement on the projections, predicting that the rate will reach an average of 21.7 percent in 2015, the second highest in Africa—from a projected rate of 16.4 percent envisioned by authorities.

Central to most Malawians grievances again is the sharp depreciation of the local currency, which this year wreaked havoc after weeks of stability and gain early in March.

The kwacha has been depreciating as a result of a combination of factors including the strengthening of the dollar, continued speculative tendencies, weak demand for Malawi’s major exports and escalated demand for the foreign currency as the economy drifts into lean period.

“But by the end of it all, it is an ordinary consumer who suffers as a weak kwacha send prices up the roof,” complained John Kapito, Consumers Association of Malawi (Cama) executive director.

Then there comes one more critical indicator, real GDP growth rate. Prospects on this indicator are bad this year.

In 2015, the World Bank projects that the rate of economic growth in Malawi will be subdued, as a series of both external and internal shocks would take their toll coupled with a weak economic environment.

“In 2015, Malawi’s estimated rate of GDP growth has been revised downwards to 2.8 percent, compared to an estimate of 5.1 percent made in February,” says the World Bank in its latest publication on Malawi, the Malawi Economic Monitor.

But there is more meaning attached to this revision.

With a slowing rate of GDP growth, the poverty rate is now expected to increase over the course of 2015, before resuming a downward trend in 2016, based on the World Bank analysis.

A six percent growth rate mark is deemed as a required threshold for an economy to meaningfully impact on poverty reduction.

The proportion of poor households living under the new international poverty line of $1.9 a day is expected to increase marginally from 69.7 percent recorded in 2014 to 69.9 percent in 2015, World Bank puts it.

Adding to that a paltry growth rate of 2.8 percent as estimated this year entails a weak consumption pattern by many Malawians , constrained government expenditure, stressed export base and poor spending, which sums up to a weak demand for goods and services.

This will likely, in the short to medium term, suffocate production entities who will be forced to downsize staff and trigger a high rate of unemployment.

This is coupled with a decline in business activity, and disruptions to utility services which had an adverse impact on the value of collected Value Added Tax (VAT), corporate income tax and import duties.

Gilbert Kachamba, who Heads Economic Department at Catholic University summarized on Tuesday that: “Lower rates of GDP growth will result in a decline in the value of collected revenues by MRA, and this will trigger a significant risk that revenue targets may not be achieved by the tax collecting body.”

While IMF country representative for Malawi Geoffrey Oestreicher thinks the negative spillover effects of reduced disposable income in agriculture sector.

“[This] will impact the retail, construction and other sectors and that the negative impact of persistent inflation on investment and consumption will all weigh towards pulling down growth in 2015,” he said.

Weak fiscal discipline

By the end of the 2014/15 fiscal year, Capital Hill had recorded lower-than-expected levels of revenue and sharply higher recurrent expenditure, and the situation remains unabated.

Fiscal authorities seem to be found themselves in a quagmire with fewer resources at hand meant to carter for a myriad of public services.

With donors—who withheld their budget aid in November 2013 nowhere to be seen—government huge recourse to domestic borrowing is now apparent.

Given the deterioration in the short-term macroeconomic outlook, it is obvious that government will continue to face tight budgetary constraints over the course of the 2015/16 fiscal year, and the World Bank subscribes to the same.

But that is dangerous and suicidal to the already fragile economy, which is like sitting on a time bomb.

A good blend and balance of monetary and fiscal policies is key in the Malawi’s ever-puzzling equation.

Chuka seems to be unmasking the truth on the root cause of Malawi’s economic malaise.

“During the last 50 years, any successes and failures with regard to inflation trends, are almost entirely attributed to fiscal prudence or lack of it,” says Chuka.

For example, he reasons that inflation cannot persist if it is not financed either by the central bank or central government or both.

“I have very much hope that the people of Malawi realise that the next 50 years can only be better than the last only if we can achieve and sustain macroeconomic stability— basically defined as low and stable inflation,” he says.

To the World Bank, difficulty in managing public expenditure is a key factor contributing to Malawi’s persistent macroeconomic instability.

The bank says until the gap between revenue and expenditure is brought under control, the short-term outlook is unlikely to improve.

Currently, the Government continues to run a large fiscal deficit, with expenditure under pressure as a result of rising debt service costs, increasing wage demands, and the cost of implementing subsidy schemes and weak fiscal discipline is the most significant contributor to Malawi’s macroeconomic instability, with the prospects for improvement remaining poor. n