malawi - international university of japan...progress in reducing tariff barriers within the region...

Country Profile 2004

MalawiThis Country Profile is a reference work, analysing thecountry�s history, politics, infrastructure and economy. It isrevised and updated annually. The Economist IntelligenceUnit�s Country Reports analyse current trends and provide atwo-year forecast.

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© The Economist Intelligence Unit Limited 2004 www.eiu.com Country Profile 2004

Contents

3 Regional overview3 Membership of organisations

9 Basic data

10 Politics10 Political background11 Recent political developments14 Constitution, institutions and administration14 Political forces18 International relations and defence

20 Resources and infrastructure20 Population20 Education21 Health22 Natural resources and the environment23 Transport, communications and the Internet25 Energy provision

27 The economy27 Economic structure27 Economic policy31 Economic performance32 Regional trends

33 Economic sectors33 Agriculture38 Mining and semi-processing39 Manufacturing40 Construction40 Financial services42 Other services

43 The external sector43 Trade in goods44 Invisibles and the current account45 Capital flows and foreign debt45 Foreign reserves and the exchange rate

47 Appendices47 Sources of information49 Reference tables49 Population49 Employment, 199850 Transport indicators50 Electricity supply50 Gross domestic product by expenditure, IMF estimates51 Gross domestic product by sector of origin52 Government finances52 Money supply

2 Malawi


53 Interest rates53 Consumer prices53 Tobacco auction sales53 Agriprocessing and manufacturing54 Stockmarket54 Tourism indicators54 Principal export commodities54 Main trading partners55 Balance of payments, IMF estimates55 Balance of payments, national estimates56 External debt, World Bank series57 Public and publicly guaranteed debt, end-199958 Net official development assistance58 Exchange rates58 Foreign reserves

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Regional overview

Membership of organisations

In August 1992 Angola, Botswana, Lesotho, Malawi, Mozambique, Namibia,Swaziland, Tanzania, Zambia and Zimbabwe signed a treaty establishing SADC.It replaced the Southern African Development Co-ordination Conference(SADCC), which was formed in 1980 by the Southern African states in a largelyunsuccessful attempt to reduce the region�s economic dependence on white-ruled South Africa. Namibia joined the SADCC shortly after independence in1990; South Africa became a member of SADC in 1994; Mauritius joined in1995; and the Democratic Republic of Congo (DRC, formerly Zaire) andSeychelles joined in 1997. However, Seychelles subsequently withdrew fromSADC in 2003 to cut costs and because it had difficulty adhering to all of theorganisation�s protocols.

SADC inherited the SADCC�s secretariat, based in Gaborone, Botswana, and theresponsibilities of each member for co-ordinating a different policy sector haveremained broadly unchanged. The end of apartheid in South Africa and SouthAfrica�s admission into SADC on August 29th 1994 inevitably shifted some ofSADC�s political and economic emphasis, but its goals remain much the same:to promote regional trade and integration, boost the region�s general economicindependence, and mobilise support for national and regional projects. In mid-1994, before South Africa joined SADC, only 4% of members� trade was withinthe community and 25% was with South Africa�this pattern has not changedgreatly.

Although SADC voted in 1994 to set up a regional rapid-deploymentpeacekeeping force�and there are long-term plans for a regional developmentbank, a common currency and a regional parliament�in recent years theorganisation has focused mainly on energy and trade issues. The membercountries aim to link their power grids, and considerable progress has beenmade on this to date. As for trade issues, on September 1st 2000 the SADCtrade protocol came into effect, having been ratified by all member states. Thisaims to remove tariff and non-tariff barriers to trade in the region by 2012,although progress will depend on the speed at which member governmentsdismantle their existing barriers to trade. So far, only South Africa has made aconcrete commitment to progress, agreeing to reduce its tariffs substantiallyduring the twelve-year period.

Progress in reducing tariff barriers within the region is also likely to becomplicated by the fact that many of the countries belong to other regionalgroupings, such as the Common Market for Eastern and Southern Africa(Comesa), diverting time and energy and occasionally presenting conflictingagendas. In addition, the EU and South Africa have now concluded their ownfree-trade agreement, and many of the other SADC countries�particularlymembers of the Southern African Customs Union (SACU)�feel that they maybe flooded with cheap European imports. However, now that the EU andAfrican, Caribbean and Pacific states have replaced the Lomé Convention with

Southern AfricanDevelopment Community

(SADC)

4 Malawi


a new agreement, the Cotonou Convention, it is clear that all SADC memberstates will have to decide whether SADC as a region should have a free-tradeagreement with the EU, or whether its members should negotiate individualfree-trade agreements on a bilateral basis. At present, SACU countries are inpreliminary negotiations with the US to draw up a free trade deal.

According to the SADC protocol, member states are bound to help defendexisting governments from foreign invasion and internal insurgency. However,when SADC has tried to resolve domestic political crises in its own region ithas created tensions. Despite South African opposition, several states senttroops to the Democratic Republic of Congo (DRC) to support the governmentof the former president, Laurent Kabila, although the moves towards peace inthe DRC since December 2002, and their subsequent withdrawal, have easedtensions. In contrast, South Africa was keen for SADC to intervene in Lesothoin September 1998 to prevent a coup, leaving South Africa open to criticism forits inconsistent regional policy. SADC also became divided on how to deal withthe worsening political and economic situation in Zimbabwe in the run-up tothe March 2002 presidential election, despite the obvious damage that thesituation in Zimbabwe had done to the region (both the fall in the SouthAfrican rand in 2002 and negative investor sentiment towards the region areblamed on the situation in Zimbabwe).

Despite its difficulties in presenting a united political front, SADC has recentlystarted to reform its institutions to further its other aim�regional economicintegration. One measure has been the establishment of an integratedcommittee of ministers, comprising at least two ministers from each memberstate. This should accelerate the implementation of policy. In addition, the oldallocation of development responsibilities to the different members has beenreplaced by four directorates: trade, industry, finance and investment; food,agriculture and natural resources; infrastructure and services; and social andhuman development and special programmes. SADC�s organ on politics,defence and security, which had been headed by the Zimbabwean president,Robert Mugabe, has now been brought formally within the organisation�sstructure and has a new chairman every year.

Based in Lusaka, Zambia, Comesa is the successor organisation to the regionalPreferential Trading Area (PTA), and came into force on December 8th 1994 with12 members. Comesa now has 19 members: Angola, Burundi, Comoros, theDemocratic Republic of Congo, Djibouti, Egypt, Eritrea, Ethiopia, Kenya,Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland,Uganda, Zambia and Zimbabwe. The Comesa region has a total population ofaround 385m and an estimated GDP of US$170bn. Lesotho, Mozambique andTanzania have all withdrawn from Comesa since 1997 to concentrate on theirmembership of SADC, while Namibia withdrew in July 2003 stating that itsindustries were too weak to compete with Comesa�s Free-Trade Area (FTA).South Africa�s decision not to join Comesa makes SADC membership moreattractive to its main trading partners.

The original PTA, launched in 1981, aimed to liberalise trade and encourage co-operation in industry, agriculture, transport and communications. Comesa�s

Common Market for Easternand Southern Africa (Comesa)

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principal aims build on these ideals; its main goals are to eliminate thestructural and institutional weaknesses of member states and to promote thepolitical security and stability necessary for sustained development, bothindividually and collectively as a regional bloc. These aims are to be achievedthrough monetary union with a single currency and a common central bank.The creation of a free-trade area on October 31st 2000 was to be a major steptowards achieving them. However, by early 2003, only nine of the 19 membershad agreed to participate fully (Djibouti, Egypt, Kenya, Madagascar, Malawi,Mauritius, Sudan, Zambia and Zimbabwe)�Rwanda, Burundi and Swazilandhave undertaken to join by early 2004, albeit hesitantly, following Namibia�swithdrawal from Comesa. Comoros and Uganda are still considering theirfutures within the FTA. The nine FTA members have removed all barriers tointra-regional trade, although they retain tariffs on imports from outsideComesa. To encourage other members to join the free trade area, a fund wascreated in 2002 to compensate those countries facing revenue loss, although thesource and extent of this funding is not clear. Although the targets of achievinga customs union by December 2004 and full monetary union by 2025 remain,neither is likely to be attained.

The most recent figures, for 2002, give total intra-Comesa trade as US$3.9bn;intra-Comesa trade as a proportion of total trade ranged from 4.3% for theSeychelles to 17.6% for Kenya. Over the past 30 years the share of Comesaexports as a percentage of intra-regional exports has grown only slightly, from9% in 1970 to 10.7% in 2002 (although these figures do not capture the high levelof illegal crossborder trade). Reasons for the low level of intra-Comesa tradeinclude a lack of political commitment and political stability in membercountries, plus weak balance-of-payments and foreign-reserves positions. Insome cases there are hardly any official trade links between member states.Egypt, Kenya, Uganda, and Zimbabwe accounted for 58.8% of the trade betweenmembers of Comesa in 2002.

As industry and manufacturing are generally poorly developed, manymembers are unprepared to reduce tariffs further for fear of undermining localindustries (Tanzania�s main reason for leaving) and fiscal revenue collection. Afurther constraint has been the strict and cumbersome rules of origin, whichare open to conflicting interpretations and are not due to be harmonised until2004. In addition to these impediments, progress towards free trade ishampered by political tensions between member states.

Regional free trade areas like Comesa aim to increase intra-regional commerce,leading to higher economic growth rates, but they attract criticism from manywho feel that this cannot be achieved while supply-side constraints�such aspoor infrastructure, inefficient transport links, low education and skills levels,and cumbersome bureaucracy�remain. Comesa has concentrated on tradeintegration, but the lack of uniformity in investment codes and regulatoryarrangements has been an impediment to crossborder trade and investment.The commitment to Comesa of many of its members is weak�in 2002 mostmembers were not paying their membership contributions�and meetings arefrequently cancelled. Moreover, attempts at promoting crossborder investment

6 Malawi


and monetary harmonisation have been superseded by initiatives introducedby the East African Community and SADC.

Under the old PTA system, a multilateral clearing facility was established and aPTA unit of account (UAPTA), equivalent to the IMF�s SDR, was used to settledebts between members, the balance being payable in US dollars. In 1997 theUAPTA was replaced by the Comesa dollar, which is pegged to the US dollar. AComesa court was officially opened in March 2001, although it had beenestablished three years earlier. In theory, the court, which aims to be anindependent arbitrator in trade-related disputes, has jurisdiction over nationalcourts, but in practice it does not have the powers to enforce its rulings and hasbeen hamstrung by a lack of finance. Comesa also set up the African TradeInsurance Agency (ATI) in 2001. Financed by a US$5m start-up loan from theWorld Bank, the ATI aims to provide political risk cover for investors in allmember countries. In November 2002 Comesa, along with other Eastern andSouthern African regional integration organisations, established the Inter-regional Co-ordinating Committee (IRCC) to promote regional economicintegration, and the integrated management of natural resources, transport andcommunications.

The African Union (AU) is the successor to the Organisation of African Unity(OAU) and is based in the Ethiopian capital, Addis Ababa. The AU was formallylaunched in July 2002 at a meeting of African heads of state in the SouthAfrican city of Durban. This came two years after the AU�s formation was firstagreed in Togo in July 2000 and followed a one-year transitional period whichbegan after the ratification of the constitutive act of the AU by two-thirds ofmember states in May 2001. The AU is modelled on the EU and has ambitiousplans for a parliament, a central bank, a single currency, a court of justice andan investment bank. The most advanced of these is for a Pan-AfricanParliament to serve as the law-making body of the organisation. This issupposed to have five members from each state and is scheduled to hold itsinaugural meeting in March 2004 (although this was put back in January). Theremaining institutions are unlikely to be established in the foreseeable future.

The AU also aims to have common defence, foreign and communicationspolicies, based loosely on those of the EU. The success of the AU, like that of itspredecessor, will depend on the individual performance of its 53 memberstates, many of which suffer from very weak governance. The OAU wascriticised for ineffectiveness�little real action resulted from its policy decisions�and it is not clear how the AU will differ. But the organisation fills the need fora forum for discussing the continent�s problems and the idea of pan-Africanunity exerts a strong hold over member countries. Many of the proposed newinstitutions and policy co-ordination mechanisms are costly and cannot befunded within the AU�s current resource allocations. In early December 2003donors and external lenders expressed their full support for the AU�s initiativesand the creation of new institutions. Another problem for the OAU was that itwas hindered by a shortage of funds, because many members failed to paytheir membership dues. This is unlikely to change and several states arecurrently banned from voting in the AU because of this. In addition, mostAfrican states are unlikely to give up the sovereignty required to make several

African Union (AU)

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of the proposed initiatives�such as a single currency or a court of justice�operate effectively. Less costly initiatives that could more effectively promoteAfrican unity include trade integration, particularly the rationalisation of themany overlapping regional trade blocs; regulatory harmonisation; and thepromotion of the rule of law and macroeconomic stability.

The principle of non-interference, which has been a major hindrance to theresolution of conflicts on the continent, is a contentious issue among membergovernments. Although non-interference was enshrined in the old OAU, the AUis attempting to tackle this issue. However, to date, it has shown the old AUtendency to support existing governments, including that of Didier Ratsiraka inthe disputed Madagascar elections of December 2001 (although hesubsequently left office) and of the Zimbabwean president, Robert Mugabe,following his disputed re-election in June 2002. However, this could change ifthe proposed Peace and Security Council (PSC), which is to replace the OAU�sMechanism for Conflict Prevention, Management and Resolution, is set up.

Modelled on the UN Security Council, it is envisaged that the PSC couldsanction military intervention in member states in cases of genocide,unconstitutional changes of government and gross human rights abuse. The AUheads of state conference held in Maputo, Mozambique, in July 2003 discussedthe PSC but failed to reach agreement as member governments are wary ofcondoning intervention in their own affairs. At the end of 2003 23 countrieshad ratified the convention, which means that the support of an additionalfour countries is required for it to come into effect. A meeting of Africandefence ministers is to be called in the coming months as a matter of urgencyto discuss the security and legal ramifications of the PSC. If established, it isplanned that the PSC will have a standing armed force comprising fivebattalions at its disposal by 2010. Western countries have promised to helpfund the force if it is established. Even without the establishment of the PSC,since May 2003 the AU has had an observer mission in Burundi, led by SouthAfrica and including troops from Mozambique and Ethiopia, to help enforce apeace agreement in that country�s civil war.

In practical terms, the most high profile AU event is the annual conference ofheads of states, which is hosted by the member state that is due to hold thechairmanship of the organisation for the next year. The current chairman of theAU is the Mozambican president, Joaquim Chissano, who took over from SouthAfrica�s Thabo Mbeki in July 2003. The day-to-day affairs of the AU aremanaged by the AU commission, which is modelled on the EU commissionand was endorsed by the AU heads of state summit in July 2003. Thecommission is headed by the former Malian president, Alpha Konaré, aided bya deputy, Patrick Mazimhaka of Rwanda, both of whom were elected at thesummit. There are also seven appointed AU commissioners.

A new 20-year convention was signed in June 2000 in Cotonou, Benin, offeringa group of 77 African, Caribbean and Pacific (ACP) countries preferential tradeand aid links with the EU. The Cotonou Convention replaced Lomé IV, aconvention which was signed in 1989 and replaced previous agreements signedin 1975, 1979 and 1984. Although similar to the Lomé conventions, the new

Cotonou Convention

8 Malawi


convention has a stronger political dimension. Respect for human rights,democratic principles and the rule of law were essential components of LoméIV; under the Cotonou agreement, ACP countries have also agreed to promotegood governance, combat corruption and try to prevent illegal immigration intothe EU.

Under previous conventions, ACP products, whether agricultural or industrial,entered the EU duty-free, although four agricultural products�beef, sugar,bananas and rum�were subject to a more restrictive system of tariff quotas.Because the type of trade agreement established by the Cotonou Conventiondoes not comply with the rules of the World Trade Organisation (WTO), thenew agreement offers a negotiating framework for tailor-made regional freetrade agreements (RFTAs), under which ACP countries, preferably withinexisting economic groupings, will gradually open their domestic markets toEuropean products. Given the adjustment costs involved, a preparatory periodof eight years has been agreed, during which the old system of preferences willcontinue to apply. However, under existing global trading rules, the 33 Africancountries classified as least developed countries will still have the option ofentering the EU's generalised system of preferences (GSP). Unlike the LoméConvention, the GSP, which benefits all developing countries, complies withthe rules of the WTO because it is based on the twin principles of non-reciprocity and non-discrimination. In September 2003 the ACP countries andthe WTO signed an agreement at the Cancun trade round, whereby the WTOwill provide training and technical assistance to ACP countries as a form ofmutual co-operation.

The European Development Fund (EDF) will remain the main source ofmultilateral European aid to the ACP countries. Under the new convention,EDF instruments have been regrouped and rationalised into two programmes:one to provide grants for long-term development schemes being carried outeither at the national or the regional level, with additional support available inthe event of a fall in export earnings; and the other to finance risk capital andloans to the private sector. The ninth EDF will total €13.5bn (US$12.9bn). Inaddition, about €10bn left undisbursed from previous programmes will remainavailable until 2007, and €1.7bn will be provided by the European InvestmentBank. The Cotonou Convention finally entered into force on April 2003 with all15 EU members and 76 ACP nations (except Somalia) ratifying the treaty. Amonth later ACP representatives signed the Brussels Declaration, which calls forthe timely and effective implementation of EDF funds. This represents acommitment towards the efficient disbursement of EDF resources for thebenefit of ACP countries.

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Basic data

118,484 sq km with five inland lakes accounting for 24,208 sq km

12.1m (end-2003; Economist Intelligence Unit estimate)

Population in �000, (2003; Economist Intelligence Unit estimates)

Blantyre 515Lilongwe (capital) 471Mzuzu 97

Tropical, cooler in highlands

Hottest month, November, 17-29°C (average daily minimum and maximum);coldest month, July, 7-23°C; driest months, June and July, 1 mm average rainfall;wettest month, February, 218 mm average rainfall

Chichewa (national language), English (official language). Chichewa isincreasingly understood throughout the country, but Chitumbuka is the linguafranca in Northern region

Metric system

Malawi kwacha (MK)=100 tambala. Average exchange rate in 2002,MK76.70:US$1. Exchange rate on December 15th 2003, MK106.5:US$1

2 hours ahead of GMT

January 1st, January 15th (John Chilembwe Day), March 3rd (Martyrs� Day),Good Friday, Easter Monday, May 6th (Labour Day), June 14th (Freedom Day),July 6th (Republic Day), October 14th (Mothers� Day), December 25th, 26th(Christmas)

Measures

Land area

Population

Main towns

Climate

Weather in Lilongwe (altitude1,000 metres)

Languages

Currency

Time

Public holidays

10 Malawi


Politics

The United Democratic Front (UDF), the party of the president, Bakili Muluzi,has been Malawi�s ruling party since 1994, and won the country�s seconddemocratic elections in June 1999. The main opposition parties are the MalawiCongress Party (MCP) and the Alliance for Democracy (Aford), both of whichhave significant internal divisions. A number of smaller parties have beenformed recently, initially to protest against Mr Muluzi�s (failed) efforts to amendthe constitution and stand for a third term in office. Many of these have begunto merge and further mergers are likely ahead of the 2004 presidential andlegislative elections. The UDF has controversially selected the minister ofeconomic planning and development, Bingu wa Mutharika, as the party�scandidate in the presidential election.

Political background

Malawi derives its name from the pre-colonial Maravi empire, a looselyorganised society in the area surrounding Lake Malawi. The Chewa, Tumbuka,Yao and Ngoni comprise Malawi�s main ethnic groups, but the country�spresent borders are largely the result of British missionary activity in the late19th century. British interest in the region culminated in the formation of theNyasaland protectorate in 1891.

A sense of national consciousness was quick to develop in the protectorate,intensified by determined nationalist opposition to the creation of the CentralAfrican Federation of Nyasaland and Northern and Southern Rhodesia (nowZambia and Zimbabwe, respectively) in 1953. Resentment grew as much of thewealth of Northern Rhodesia and Nyasaland was channelled to SouthernRhodesia, and in 1959 a state of emergency was declared, resulting in theimprisonment of large numbers of nationalists, including Hastings Banda, oncharges of plotting armed rebellion. The Central African Federation wasdissolved in 1963 and Dr Banda became the prime minister of self-governingNyasaland and on July 6th 1964 prime minister of independent Malawi. Twoyears later, Malawi became a republic with Dr Banda as its president.

The security forces intervened decisively on Dr Banda�s behalf to quell an earlychallenge to his rule by a coalition of younger politicians. This set an ominousprecedent, and the Banda regime grew more authoritarian and dictatorial.Dr Banda declared himself president for life in 1970. Politics under Dr Banda�spresidency were similar to those at the court of an absolute monarch with noheirs. By the end of the 1980s, the population had begun to question theeconomic inequalities and political repression that they had endured under theBanda regime. Falling living standards, the influx of more than 1m refugeesfrom war-torn Mozambique, the success of the opposition in the 1991 electionsin Zambia and the support of Malawi�s churches all galvanised opposition tothe one-party system and to Dr Banda. The splintered opposition in exileregrouped, but the push for change came from the towns and cities.

The emergence of HastingsBanda

Early history

Malawi 11


At the end of 1992 Dr Banda gave in to the growing pressure and announced areferendum on changing the political system. The referendum, held on June14th 1993, resulted in a 63% vote for multiparty democracy. Two weeks later,opposition parties were legalised and Dr Banda announced an amnesty for allpolitical prisoners and exiles. An interim parallel administration withrepresentatives from all parties was put in place, charged with steering thetransition to political pluralism. A new interim constitution was drafted andrushed through parliament on March 16th 1994, weeks before the presidentialand parliamentary elections.

In Malawi�s first post-independence multiparty elections, held in 1994, theleader of the UDF, Bakili Muluzi, a former cabinet member who was sackedafter falling out of favour with Dr Banda in the early 1980s, ousted Dr Bandafrom the presidency. The UDF failed to win an overall majority in theparliamentary election. It had vowed that it would never co-operate with theMCP (Dr Banda�s party), so Aford held the balance of power. Initially, Afordformed an opposition coalition with the MCP, but in September 1994 it joinedthe UDF in government. The alliance between Aford and the UDF lasted untilJune 1996, after which Aford boycotted parliament, leaving the UDF in powerbut without a parliamentary majority. The UDF gained a majority briefly in1998, but lost it again following the death of several MPs.

Recent political developments

Four candidates competed for the presidency in June 1999, and eight partiescontested the parliamentary election. The turnout was high and internationalobservers generally deemed the elections free and fair. However, the build-upto the elections was chaotic and poorly organised, and polling day was twicepostponed because of problems with voter registration. In addition,constituency boundaries were redrawn shortly before the elections, amidcontroversy over the regional allocation of the new seats. In a move designedto consolidate the opposition vote and oust the UDF government, the MCP andAford fought the presidential election as an alliance. Nonetheless, Mr Muluziwas re-elected by a narrow majority.

Presidential election results, Jun 1999Party Votes (�000) % of total a

Bakili Muluzi UDF 2,433 52.3Gwanda Chakuamba MCP-Aford 2,107 45.2Kamulepo Kalua MDPa 68 1.5Others � 47 1.0Total � 4,655 100.0

a Malawi Democratic Party.

Source: MalawiNet.

The UDF failed to win a majority in the parliamentary election. However, byOctober 1999, after the UDF had won three by-elections and the support of fourindependent MPs, Mr Muluzi�s party succeeded in gaining control ofparliament. Since then its majority has been bolstered by a steady succession of

1999 elections

1994 elections

Moves towardsmultiparty democracy

12 Malawi


by-election victories. As in the 1994 elections, the distribution of parliamentaryseats followed clear regional voting patterns: the UDF remains the party of thepopulous Southern region, the MCP controls most of Central region, and Aforddominates Northern region.

It says much about the self-serving nature of local politicians that manoeuvringin preparation for the next presidential and parliamentary elections dominateddomestic politics virtually from the day after the results of the 1999 electionswere confirmed. (An opposition legal challenge to the election results wasdefeated in May 2000.) Mr Muluzi was elected for his second, andconstitutionally final, term in 1999. The lack of an obvious successor toMr Muluzi within the UDF and the patronage network created by the presidentresulted in an active campaign for a third term. These efforts initially focusedon drumming up support for a referendum to alter the constitution to allowMr Muluzi to stand for another term. Once it became clear that there wasinsufficient public support to win such a referendum, the government tried topass a parliamentary bill that would remove the term limit. This failed by onlythree votes in July 2002, as some MPs changed their mind at the last moment�the vote was only held because the UDF was convinced that the bill would bepassed. In a final effort, Mr Muluzi tried to get the limit increased from two tothree terms, but it was clear that there was not enough support for this motionto be passed when it was discussed at an emergency session of parliament inJanuary 2003. In a face-saving measure the bill was then passed to theparliamentary legal affairs committee for technical consultation. Although thebill has not been officially killed off, Mr Muluzi�s address to the final session ofparliament before the election, on November 18th 2003, indicated that he hadfinally admitted defeat in his efforts to stand for a third term.

The �third term� issue and its aftermath has had an impact on most facets ofpolitical activity in Malawi. Most significantly, in April 2003 Mr Muluziannounced the formation of a government of national unity, which includedfive members of the opposition Aford. The appointments to the new cabinetwere very clearly made to reward those people who supported Mr Muluzi�sthird-term bid. The outgoing UDF ministers had all voiced their concerns overthe third term, whereas the incoming faction of Aford members, headed by theparty president, Chakufwa Chihana, campaigned in favour of the issue. Theremainder of Aford has formed a new party, the Movement for GenuineDemocratic Change (MGDC). The formation of the national unity governmentwas done with the 2004 elections in mind. Mr Muluzi is aware thatdisenchantment with the UDF over poor economic performance and the third-term issue will cost it some seats, but these should be compensated for byAford�s support base in the north. For a real chance of success against theUDF/Aford coalition, the opposition parties need to unite around a commonplatform and candidate at the presidential election. There is an awareness ofthis, but the strength of personality of the main opposition leaders makes itunlikely that any of them will step aside for a common cause.

The �third term� issue

A government of nationalunity is formed

Malawi 13


Important recent events

January 2001A leading member of the United Democratic Front (UDF), Brown Mpinganjira, formsa pressure group, the National Democratic Alliance (NDA). He is subsequentlyexpelled from the UDF, together with other NDA members.October 2001Following pressure from donors, the privatisation programme is restarted (it wassuspended unexpectedly in July 2001).

November 2001

The government tries to impeach three judges on the grounds that their rulingsfavour the opposition.

January 2002

The Alliance for Democracy (Aford) ends its alliance with the Malawi Congress Party(MCP) and its leader, Chakufwa Chihana, declares his backing for the UDF, aposition not supported by the majority of Aford MPs.

July 2002

The president, Bakili Muluzi of the UDF, publicly declares that he will not run foranother term in office, after a parliamentary motion to remove the limit on thenumber of terms a president can serve (currently two) was defeated by three votes.Privately he continues his efforts to stand again.

August 2001

The poverty alleviation minister, Leonard Mangulama, is sacked for his part in thesale of the strategic maize reserve.

January 2003

An emergency parliamentary session is held to debate a bill proposing the extensionof the number of permissible presidential terms from two to three. The bill waswithdrawn owing to lack of support.

March 2003

The National Executive Committee of the UDF chooses Bingu wa Mutharika, theeconomic planning and development minister, to be the party�s candidate for thepresidential election. A party congress endorses this in August.

April 2003

John Tembo is elected president of the MCP at a stormy party congress. Hispredecessor, Gwanda Chakuamba becomes deputy president.

May 2003

A government of national unity is formed. The new cabinet contains five membersof Aford and is purged of those UDF members who failed to support Mr Muluzi�sbid for a third term.

October 2003

The IMF resumes disbursements under Malawi�s poverty reduction and growthfacility (PRGF), which had been frozen since December 2000. Other donors alsobegin to disburse previously withheld funds.

14 Malawi


Constitution, institutions and administration

The new multiparty parliament promulgated a fresh constitution in 1994. Theconstitution curtails the absolute powers that had previously been vested in thepresident. Based largely on the US constitution, the constitution enshrinesmultiparty democracy and an independent judiciary. It features a bill of rightsand retains the death penalty, although there have been no executions since theconstitution was drafted. The constitution provides for a single legislative body,the National Assembly, consisting of 177 seats elected by a direct vote fromconstituencies. Before the 1999 elections, the number of seats in the NationalAssembly was increased to 193. Local elections were finally held in November2000, ending six years with no local authorities (mayors, city councils and ruraldistrict councils). The local authorities have the power to levy taxes, spendmoney at their own discretion and run social services. A second chamber ofparliament (the Senate) was, according to the constitution, supposed to beestablished two months after the local elections. However, parliament decidednot to proceed with this, ostensibly on the grounds of cost.

Judicial independence has come under pressure in recent years. In late 2001,the government attempted to impeach three judges who had produced rulingsthat it disagreed with, but bowed to donor pressure not to proceed with this. Areport released by the International Bar Association in mid-2002 concluded thatjudges lack resources and are subject to pressure from the legislature. Concernswere raised over freedoms of speech and assembly after Mr Muluzi banneddemonstrations about the third-term issue. The government also ignored a HighCourt ruling when it detained and deported five alleged al-Qaeda suspectswho had not been charged in June 2003. Besides encroaching on judicialindependence, the activities of politicians have undermined the population�sfaith in the parliamentary process. Parliamentarians openly admitted that theyhad been offered�and in many cases accepted�bribes to support the third-termmotions in parliament at the same time as the country was experiencing itsworst famine in 50 years. Furthermore, politicians from all parties have beenembroiled in high-profile corruption scandals.

Political forces

The UDF was launched in 1992 and won the first multiparty election in 1994.Since October 1999 the UDF has had a parliamentary majority, after rulingwithout one for most of its first term. On the policy front, the UDF promotesfree-market economics. However, its management of the economy has beeninconsistent and it has been widely criticised for corruption. Divisions overwhether Mr Muluzi should stand for a third term and the subsequent choice ofMr Mutharika as the party�s candidate for the presidential election have causedsplits within the UDF. Dissenters have not been tolerated and have either beenforced out of the party or have bowed to presidential pressure not to speak outin public.

Mr Mutharika and his running mate, the former education minister, CassimChilumpha, were chosen at the party�s convention in August, its first since 1994.

United Democratic Front

A new constitution in 1994

Malawi 15


These appointments reflect the wishes of Mr Muluzi, and, although publicpronouncements indicated that any UDF member was welcome to standagainst the officially anointed team, a number of those that did werethreatened and withdrew their candidacy. Probably the most importantappointment made at the UDF convention was that of Mr Muluzi as the party�snational chairman for a five-year period. Previously the UDF was led by itspresident�a role held by Mr Muluzi since the party was formed in 1992. Giventhat Mr Mutharika has no power base within the UDF and owes his positionentirely to Mr Muluzi, the latter will retain the majority of his influence overthe party when he stands down as national president. As many of the UDFhierarchy are aggrieved that the selection of Mr Mutharika has stymied theirown presidential bids, internal party relations are tense, although the risk oflosing power means that these tensions will not spill out in public until afterthe election.

The MCP, the party of the late Hastings Banda, lost power in 1994. SinceDr Banda�s death on November 25th 1997, the party has suffered a seriousreversal, much of it caused by in-fighting between John Tembo and GwandaChakuamba, who was chosen�surprisingly�to be party president ahead ofMr Tembo in 1997. In August 2000 the two factions held parallel leadershipelections and a High Court battle over the party�s leadership lasted until early2003, when a series of meetings led to reconciliation between the two. In AprilMr Tembo was elected president of the MCP and the party�s candidate for thepresidential election, at a stormy national congress where it became clear thatthere is little love lost between the two men and no immediate prospect ofinteraction between their supporters. Further hindering the party�s electionprospects is the conviction of Mr Tembo on contempt of court charges�Mr Tembo is appealing to the Supreme Court against the decision. If his appealfails it will mean that he is constitutionally barred from serving in parliamentor the government for seven years. Should this happen, Mr Tembo could selecta replacement from within the party over whom he would retain control, orMr Chakuamba could become the party�s candidate. The latter appears morelikely to countenance joining an opposition coalition, which is essential to beatthe UDF.

Since its formation in 1992 Aford has spent most of its time in a coalition witheither of the other two main parties (the MCP and the UDF). It joined the UDFin power in 1994 and by the following year it boasted six cabinet positions. Theparty�s leader, Chakufwa Chihana, led Aford out of the coalition in June 1996,but several members refused to follow him, choosing instead to remain incabinet. Mr Chihana ended Aford�s alliance with the MCP in late 2001 andannounced his backing for the UDF. This alienated many of the party�s MPs anddisenchanted much of its core constituency in the north. The formation of thegovernment of national unity in April 2003, which saw Mr Chihana appointedas second vice-president and five of its MPs given cabinet posts, goes some wayto vindicating the risk that Mr Chihana took in aligning with the UDF.Mr Chihana can now argue that Aford is having an influence on government(the cabinet positions will also allow a considerable amount of largess to bechannelled to the north of the country). However, opponents of the link with

Malawi Congress Party

Alliance for Democracy

16 Malawi


the UDF have not been placated, and around half the party�s MPs formed theMovement for Genuine Democratic Change (MGDC) in late 2003. Mr Chihana�sabrasive leadership style has annoyed party members and has been a factor inAford�s inability to win support beyond its northern power base.

The National Democratic Alliance (NDA) formally registered itself as a politicalparty in mid-2003. Previously it had been a pressure group since being foundedby four UDF MPs led by Brown Mpinganjira�a former transport minister andthe UDF�s de facto second in command�in January 2001 in opposition toMr Muluzi�s third-term bid. Mr Mpinganjira is feared by the UDF and has facedtrumped-up charges of treason and murder in an attempt to discredit him andthe party. These have been unsuccessful and have actually served to increase hisprofile. Mr Mpinganjira is the party�s candidate for the presidential election andconsiders himself to be the leader of a joint opposition bid. AlthoughMr Mpinganjira has cemented his strong support base in the south, around theMulanje area, he has failed to make much progress in other areas of the country.

Growing disenchantment over Mr Muluzi�s bid for a third term and thegenerally self-serving nature of politicians from all major parities in the face ofa stagnant economy has lead to the formation of a number of smaller parties inrecent years. The most important of these is the People�s Progressive Movement(PPM), launched in March 2003. Led by the former chairman of the Malawichamber of commerce, Jimmy Koreia-Mpatsa, the PPM commands the supportof a former agriculture minister, Aleke Banda. Mr Banda�s support is importantbecause he owns The Nation, one of Malawi�s two main daily newspapers. ThePPM is expected to merge with two other small parties�Malawi Forum forUnity and Development and the People�s Transformation Party�who want tointroduce a new generation of political leadership and revive the economy. Thesmaller parties are pushing for the opposition to unite behind a singlecandidate in order to defeat the UDF at the 2004 election. They have alreadycourted the influential Catholic Church, which has lost faith in the UDF and isfar more respected than any of the political parties.

Main political figures

Bakili Muluzi

A former cabinet minister in the Banda government, Mr Muluzi was electedpresident in 1994 and re-elected in 1999. He is still considered one of the fathers ofdemocracy in the country, but his government has shown increasingly autocratictendencies and corruption has worsened during his second term. Although heappears to have given up in his attempt to stand for a third term, should theopportunity arise he would grasp it. Expected to remain the �power behind thethrone� in the event of Bingu wa Mutharika�s winning the presidency.

Bingu wa Mutharika

Mr Mutharika was little known outside academic circles before being chosen as thecandidate of the United Democratic Front (UDF) for the presidential election. Hestood as the candidate for the United Party in the 1999 presidential election, butpolled less than 1% of the vote. Prior to this Mr Mutharika was secretary-general ofthe Common Market for Eastern and Southern Africa (Comesa) from 1991 until 1998,

National Democratic Alliance

Other parties

Malawi 17


but left the organisation under a cloud owing to allegations of maladministration.Since his appointment, Mr Mutharika has made a number of gaffes and has yet todevelop any kind of support base within the party or among the population.

Brown Mpinganjira

The leader of the National Democratic Alliance (NDA), Mr Mpinganjira was expelledfrom the UDF in January 2001 after forming the NDA to campaign against a thirdterm of office for Mr Muluzi. He is a shrewd and charismatic operator who will be acandidate at the next presidential election. Mr Mpinganjira may suffer from his closeties with the UDF, where he was considered the de facto number two for a long time,and from attempts by the ruling party to discredit him.

Friday Jumbe

He was promoted to minister of finance in January 2002 from the post of chiefexecutive of the state-controlled agriculture produce company, AgricultureDevelopment and Marketing Corporation (Admarc). Politically well connected,Mr Jumbe was cleared of involvement in a corruption scandal over the sale of thestrategic maize reserve by the presidential commission in mid-2003. It is rumouredhe may be considering challenging Mr Mutharika.

Gwanda Chakuamba

Mr Chakuamba lost the presidency of the Malawi Congress Party (MCP) to JohnTembo in April 2003. He had previously held the position since 1997, during whichtime many members of the MCP were disappointed by the party�s performance.With a shadow hanging over Mr Tembo�s candidacy at the 2004 presidentialelection, Mr Chakuamba can not be ruled out. He still commands the support ofaround 40% of the party.

John Tembo

A former governor of the Reserve Bank of Malawi (RBM, the central bank) and right-hand man to Hastings Banda, Mr Tembo, now in his 70s, was appointed president ofthe MCP and its candidate for the presidential election in April 2003. Hisparliamentary seat was declared vacant in early 2003 after his conviction forcontempt of court; this threatens to prevent him from standing in the presidentialelection. Even if this is the case he will retain influence over the majority of theparliamentary party.

Chakufwa Chihana

Leader of the Alliance for Democracy (Aford) and second vice-president (a positionhe also held in 1995 and 1996). A wily political character who has lost the support ofmuch his party, but regained a position in government by his decision to break offan alliance with the MCP and switch his support to Aford. He has not managed toincrease support for Aford from its base in Northern region. His reputation istarnished by allegations of corruption.

Jimmy Koreia-Mpatsa

Former chairman of the Malawi chamber of commerce and leader of the People�sProgressive Movement (PPM). Well-respected local businessman who de facto leads agroup of new parties looking to introduce a new generation of political leadership.He should get a senior position if an opposition coalition is elected, and may be aserious contender for the 2009 presidential election.

18 Malawi


International relations and defence

Malawi currently enjoys friendly relations with most of its neighbours inSouthern Africa and with the Western powers. Malawi has remained neutral inthe recent conflicts in the region and some Malawian soldiers were deployed inthe DRC as part of an African Union peacekeeping initiative. Mr Muluzi hasplayed a part in mediating in the Sudanese civil war and, helped by his Muslimbackground, he has build closer relations between Malawi and the Islamicworld. This has been criticised by some Christian organisations�Christiansform a slight majority in Malawi�but has caused little social tension. Islamiccountries have been a growing source of funding for the Muluzi administration,particularly when Western donors have withdrawn funding. Mr Muluzi waspart of a troika of African leaders that visited Zimbabwe in May 2003 to holddiscussions with government and opposition figures to resolve that country�srapidly deteriorating economic situation. Mr Muluzi is not particularly close tothe Zimbabwean leader, Robert Mugabe, but the Malawian economy has beenhurt by the collapse in Zimbabwe and it may have been thought that as theleader of a fellow Southern African state, Mr Muluzi might be able to exertsome influence on the Zimbabwean president. This and subsequent attemptsat mediation by Mr Muluzi have proved fruitless�as have other leader's efforts.

Generally, Malawi has benefited from good relations with the West and hasreceived significant amounts of bilateral aid from the US, the UK, Germany andJapan. However, this dependence on foreign aid makes the country vulnerableto external pressure. External financing, particularly from the IMF, has beensuspended several times owing to Malawi�s failure to comply with IMFprogrammes. The powerful influence of Western donors on Malawi was clearlyillustrated by the two cabinet reshuffles in 2000 and the speedy resumption ofthe privatisation programme in 2001 (after its surprise suspension), all as aresult of donor pressure.

Relations with donors have recently been damaged by allegations of corruptionin the use of donor funds, and significant funding has been withheld. Donorsview with concern problems over governance and the rule of law and theirscrutiny will remain high. Donors were very concerned about Mr Muluzi�s bidfor a third term of office. Although bilateral donors have followed the lead ofthe IMF when it resumed funding in October 2003, bilateral assistance may bewithheld if the government tries to limit democratic rights or judicialindependence ahead of the elections, even if agreed economic targets are met.

Malawi�s military forces numbered 5,300 active personnel in 2003, according tothe International Institute for Strategic Studies. This includes a marine force of220, which patrols Lake Malawi, and an air force of 80, which operates severalhelicopters, transport aircraft and Blowpipe anti-aircraft missiles. The utility ofmuch army equipment is debatable. Malawi�s well-armed and -trained MobilePolice Force, numbering 1,500, is often deployed for internal securityoperations. A small number of Malawian observers are attached to MONUC,the UN mission in the Democratic Republic of Congo; this is the country�s onlyexternal military commitment.

Relations with the West

Friendly relations with itsneighbours

Military forces

Malawi 19


Military forces, 2003Army 5,300 Air force 80 Navy 220Mobile Police Force 1,500

Source: International Institute for Strategic Studies, The Military Balance 2003/04.

Security risk in Malawi

Armed conflict

Malawi has fairly good relations with its neighbours�Mozambique, Tanzania andZambia�none of which is involved in military conflicts. The country has not beeninvolved in an external conflict since independence and is not expected to do so.Although political protests have turned increasingly violent in recent years, these areunlikely to deteriorate into armed clashes. Foreign businesses can operate in Malawiwithout fear of disruption by armed conflict.

Unrest and demonstrations

Political unrest in the main cities has increased since the government�s clampdownon the opposition, and may worsen in the run-up to the elections, which arescheduled for 2004. Supporters of both the opposition and the government�and,occasionally, candidates in elections�have been killed in outbreaks of violence atelections and political meetings. A worrying development has been the risingprominence of the �militant� wings of a number of political parties, which are ineffect violent mobs that target other parties� meetings. Much of this violence iscarried out in the presence of the police, who wear yellow T-shirts to distinguishthemselves. Business may be disrupted by the police�s blocking of roads andprotection of commercial centres, though there is no evidence that foreign businessesare being targeted. Spontaneous civil disturbances, mainly connected to labour andstudent demonstrations, sometimes occur.

Violent crime

Violent crime is not a serious problem in Malawi, but reasonable precautions shouldbe taken. Car-jacking and domestic burglary occurs sporadically throughout thecountry; the perpetrators of these crimes are usually armed and may use violence.Street crime, such as robbery, is less common. There is a higher risk of such crimesnear the border with Mozambique, where former combatants in Mozambique�s civilwar have sold their weapons to local people.

Organised crime

A marked increase in organised crime followed the relaxation of state control at theadvent of multiparty democracy in Malawi. Criminal groups tend to be small andbased on family or community. There does not appear to be a rigid structure toindividual groups or across the fraternity as a whole; instead a complex andchanging network of criminal groups and organisations conduct illicit activity. Manyof these groups are linked to drug-trafficking�cannabis is grown in several remoteregions of the country. In 2000, police impounded 80,000 kg of cannabis in a totalof 1,198 drug-related cases. Current legislation to combat organised crime isinadequate. However, organised crime poses little threat to foreign businesses.

20 Malawi


Kidnapping and extortion

Kidnapping of political opponents was common during the Banda era, but has notbeen much seen since multiparty democracy was established. Neither kidnappingnor extortion are a threat to foreign business.

Resources and infrastructure

Population

The 1998 census put Malawi�s population at 9,933,868, with 57% of the popu-lation under the age of 20. The population growth rate between 1987 (the yearof the previous census) and 1998 averaged 2% per year, compared with 2.65% inZimbabwe. Previous estimates, including estimates from the IMF�which has sofar stuck to its old figures�put this growth rate much higher, at just under 3%. Inthe 30 years following Malawi�s independence in 1964, the population morethan doubled from an estimated 4m to 11.9m at the end of 2002.

According to the census, although 86% of the population lives in rural areas,urbanisation is a growing trend�the urban population grew at an annual rateof 4.7% between 1987 and 1998. Population growth is a problem, as almost allsuitable arable land is under cultivation. A national sample survey ofagriculture in 1992/93 showed that 78% of rural households had less than 1 haof land, a serious deterioration from the previous survey in 1985/86, which putthe figure at 55%. The World Bank also estimates that 564 sq km of forest werelost between 1990 and 1995. With around 109 people per sq km of arable land(according to World Bank 1997 data), Malawi is one of the most denselypopulated African countries. Like other counties in the region, it has a youngpopulation�72% are aged 24 or below. Malawi�s demographic trends aredominated by the high death rate, which is caused mainly by the effects ofpoverty, the HIV/AIDS epidemic, chronic malnutrition and substandard healthservices (see Health).

Education

Adult illiteracy in Malawi is high. According to UNDP estimates, in 2001 39% ofadults in Malawi were illiterate. Only around 15% of the children at primaryschool go on to secondary education. In addition, high rates of childmalnutrition in Malawi and the long distances walked by children to schoolshave resulted in high failure and drop-out rates�the drop-out rate for childrenbetween 9 and 12 years of age is 15% for girls and 20% for boys. Malawi�s pooreducational standards do not prepare people for jobs in industry andmanufacturing, and surveys have found that the undereducated rural poor arenot able to grow crops like tobacco which need intensive tending.

When the government abolished fees for primary schools in September 1994,primary school enrolment shot up from 1.9m to 2.9m. Although providingeducation for a greater percentage of the population has been one of the

A young, growing population

Highly rural population, buturbanisation advances

Illiteracy rates are high

School enrolmentis growing

Malawi 21


achievements of the government, the increasing number of new students hascaused quality indicators to deteriorate and classroom sizes and student-teacherratios have grown�the pupil:teacher ratio for primary education stood at 59:1 in1999, compared with 39:1 in Zambia, 37:1 in Tanzania and 58:1 in Mozambique.The network of village-based schools, established with donor assistance, hasgrown rapidly since the mid-1990s, but will need to be developed further if thegovernment pursues its intention of making school attendance compulsory.Enrolment in secondary and higher education has also grown during the lastdecade. One of the conditions for debt relief under the IMF and World Bank�sheavily indebted poor countries initiative is that expenditure on educationshould rise, in real terms, year on year.

Health

Health statistics for Malawi are bleak. According to the UNDP, the childmortality rate (the number of children dying before their fifth birthday per1,000 births) was 114 in 2001. Life expectancy in Malawi is amongst the lowestin the world. In 2001 Malawians had a 60% likelihood of dying before their40th birthday and is set to drop further as the HIV/AIDS epidemic takes agreater toll. The primary cause of these dismal figures is poor nutrition and alack of access to clean drinking water�the UNDP estimated that only 44% ofthe rural population had such access in 2000, though this figure jumps to 95%in urban areas.. Other contributory factors include the lack of hospitals, clinics,doctors and nurses or trained health workers. Although health indicators aregenerally better in Blantyre and Lilongwe, the poor state of health of thepopulation has had a direct impact on the productivity of the workforce.

Health services in Southern AfricaExpenditure

per head (US$) a % of GDP bPhysicians

(per 100,000) aNurses

(per 100,000) aHospital beds

(per 1,000) ac

Botswana 155.0 4.2 23.8 219.1 1.6Lesotho 21.0 5.6 5.4 60.1 1.1Malawi 8.9 5.8 3.0 n/a 1.3Mozambique 12.7 5.8 3.0 n/a 0.9Namibia 113.7 7.5 29.5 168.0 0.3South Africa 203.0 7.1 56.3 471.8 0.8 c

Swaziland 42.6 3.4 15.1 n/a 0.7Tanzania 13.0 4.8 4.1 85.2 0.9Uganda 11.7 4.1 n/a 18.7 0.9Zambia 19.8 5.9 6.9 113.1 n/aZimbabwe 33.2 6.2 13.9 128.7 0.5

a 2000. b 1997. c Public hospitals only.

Source: IMF.

HIV and AIDS

The HIV virus and AIDS have ravaged Malawi. According to UNAIDS (the UnitedNations body co-ordinating the fight against AIDS), 15% of the population agedbetween 15 and 49 were living with HIV/AIDS at the end of 2001, and 80,000Malawians died from AIDS during that year. An IMF study indicates that populationgrowth could fall below 1% by 2010 because of AIDS-related deaths. AIDS causes

Health indicators are poor

22 Malawi


widespread economic as well as social disruption, reducing the skills base andincreasing staff turnover; UNAIDS estimates that by 1997 over 10% of teachers intowns had died from AIDS, and by 2005 this figure is forecast to increase to 40%.There is also evidence that urban and educated segments of the population aredisproportionately affected, which will affect productivity in the future. UNAIDSestimates that by 2010 AIDS will cause an annual loss in GDP growth per head of0.7 percentage points.The National HIV/AIDS Strategic Framework (2000-04) and the Agenda for Action,launched in October 1999, set out principles and goals for the period in questionwhich are being used to develop specific plans at district level. The plans prioritiseinstitutional capacity-building, promoting the use of condoms, increasing access toanti-retroviral drugs and improving education and the reproductive health servicesavailable to young people. The total cost of implementing the framework isestimated at US$121m (of which the government will pay US$445,000). In 2003Malawi signed an agreement with the Global Fund for Aids for US$196m over thenext five years, in addition to the World Bank's Multi-country Aids Programme,which has pledged US$35m over the next four years. Such funding is essential if thegovernment is to have any chance of managing the epidemic in the coming yearsand meeting the anti-AIDS objectives laid out in its 2002 poverty reduction strategypaper (PRSP).

HIV/AIDS, 2001(% of adult population living with HIV/AIDS)

Côte d�Ivoire 9.7Kenya 15.0Malawi 15.0South Africa 20.1Zambia 21.5Namibia 22.5Zimbabwe 33.7Botswana 38.8

Source: UNAIDS, Report on the Global HIV/AIDS Epidemic.

Natural resources and the environment

Malawi�s tropical climate and fertile soil make it a very productive agriculturalregion when rainfall is good. Although average rainfall is considerably betterthan in Zimbabwe, the rainfall pattern has been erratic in the past decade. Tocompound problems, the country�s high population density is exertingmounting pressure on land (see Agriculture). Farming in marginal areas andland degradation�which leads to flooding�are an increasing problem. LakeMalawi, which covers 20% of the country, is another vital resource. The annualfish catch from the lake provides 75% of the animal protein consumed by thepopulation. However, the lake has been overfished and fish production perhead has fallen since the mid-1980s. The Department of Fisheries is engaged inseveral projects to increase fish production in order to sustain the fishingindustry, which employs an estimated 200,000 people.

Malawi 23


Transport, communications and the Internet

Malawi is a landlocked country that depends on the overland movement ofexports and imports. Its transport network and connections to neighbouringcountries are therefore of the utmost economic importance. The shortest,cheapest trade routes are to the Mozambican ports of Nacala and Beira�Nacalais the preferred port for Malawian exporters as Beira is shallower and suffersfrom siltation. Until 1982, around 95% of Malawi�s trade passed through the twoports, but throughout the 1980s and early 1990s the Mozambican civil wardisrupted these routes, forcing most export and import traffic to be routedthrough distant ports in South Africa and Tanzania.

The end of hostilities in Mozambique has benefited Malawi by reopeningshorter and cheaper rail and road routes to ports on the Mozambican coast. Sofar, however, the volume of freight being rerouted through Mozambique hasbeen lower than expected. Mozambique�s railways were severely damagedduring the civil war, and rehabilitation on both sides of the border has beenslow. The rail link to Nacala was not fully rehabilitated until December 2002,following the diversion of donor support to the project to expedite foodimports. Management of the track and the trains will be the responsibility ofthe Malawian and Mozambican governments.

Rail passenger and cargo traffic1996 1997 1998 1999 2000

Local traffic (�000 tonnes) 132 167 197 224 190External traffic (�000 tonnes) 120 136 144 140 228Passengers (�000) 339 452 349 522 420

Source: National Economic Council, Economic Report 2001.

Malawi�s domestic road network is inadequate. At independence in 1964 thecountry had 10,124 km of roads, of which only 431 km were tarmac. By 1995 theroad system had been expanded to 14,594 km, of which 2,849 km were paved.Even the Ministry of Works has described the roads as being in �very poorcondition�. Financial assistance from the EU�s road maintenance initiative since1998 has allowed the rehabilitation of some roads; new routes are also beingconstructed. The tendering process for road construction and rehabilitationcontracts is particularly vulnerable to corruption. The total number of vehicleson the roads has increased, but the World Bank estimates that there are only sixvehicles per 1,000 people. Despite this, Malawi has one of the worst roadsafety records in the world, with 89 people injured or killed per year per 1,000vehicles. This is mainly because of the poor state of the roads and the failure toenforce road safety laws.

The number of passengers passing through Lilongwe International Airport hasaveraged around 205,000 since 1995. Another 110,000 people per year passthrough Chileka International Airport (outside Blantyre). In 1997 Air Malawistopped flying to London, although in March 1998 Air Zimbabwe began directflights to the UK from Lilongwe in co-operation with Air Malawi. Other foreignairlines operating from Malawi include KLM, South African Airways andBritish Airways. Air Malawi and South African Airways also operate from

Mozambican corridorsare rehabilitated

Patchy road network

Two international airports

Transport routes are crucial

24 Malawi


Blantyre in the south. Malawi�s second commercial airline, Malawi Express (aprivate firm), launched services in the first half of 2001. It currently runsservices to Johannesburg, Harare and Lusaka and plans to serve destinationsfarther afield. The sale of a 49% stake in Air Malawi�the maximum that can besold if the company is to maintain its landing rights�has dragged on for severalyears. After a number of lapsed deadlines, South African Airways and BritishAirways both submitted bids for the 49% stake in late 2002. New privatecapital is urgently needed as the airline is riddled with inefficiency and nearthe point of collapse.

Malawi Telecommunications (MTL) was formed in May 2000 when the postaland telecoms functions of Malawi Post and Telecommunications Corporation(MPTC) were split and is in urgent need of privatisation to improve services.Poor telecoms development is hindering the development of the country andMTL is in effect bankrupt. The government has been attempting to sell a 30%stake in MTL for some years, but a deal agreed with a consortium headed bya Zimbabwean telecoms company, Econet Wireless, collapsed in late 2002when Econet withdrew over doubts about the profitability of the venture.MTL is hoping that the injection of new capital following privatisation willallow it to proceed with plans to upgrade the country�s existing 45,000landlines and increase provision to 150,000 lines by 2005, though this seemshighly optimistic.

Use of cellular telephones has spread rapidly as coverage has improved, andcellphone subscribers now exceed the number of landlines. Malawi�s first cell-phone network, Telekom Networks (a joint venture between Telekom Malaysiaand MPTC), was launched in July 1996. In 1999 the licence for a second networkwas awarded to Celtel Malawi, a joint venture between a British company,Mobile Systems, the Malawi Development Corporation, Indebank and MPTC.According to the terms of Celtel�s licence another new licence was not to beissued within five years. However, in May 2002, Malawi Mobile, a joint venturebetween a local business consortium and Ubambo (a group of South Africanblack empowerment companies), was awarded the third licence. The telecomsregulator, the Malawi Communications Regulatory Authority (Macra), dismissedCeltel�s complaints on the grounds that that the agreement was made with thegovernment before Macra came into existence and that therefore, it is not boundby it. Most cellphone customers use pre-paid tariffs.

Telecoms indicators1996 1997 1998 1999 2000

Mainlines in operation 35,471 36,754 37,371 41,362 45,000Waiting list for mainlines 29,854 30,902 31,554 31,554 25,000Cellular phone subscribers 3,700 7,000 10,500 22,500 49,000PCs in use n/a n/a 8,000 10,000 12,000Internet users n/a 500 2,000 10,000 15,000

Source: International Telecommunications Union, African Telecommunication Indicators.

The media were strictly controlled during the Banda era. Since 1994 there hasbeen an explosion in new publications, but many have closed for financialreasons. There are two daily newspapers�Nation and Daily Times�and three

Poor telecoms a hindrance todevelopment

Mobile telephony

Media

Malawi 25


weekend papers�Malawi News, Weekend Nation and Weekend Mirror. Most ofthe print media is privately owned, but none of the papers is independent.Daily Times is owned by Blantyre Print and Publishing, which is connected toMr Tembo and the MCP; Nation is part-owned by Aleke Banda, the formeragriculture and irrigation minister. Low-level repression of newspaper editorshas increased as scrutiny of government policy and investigations intocorruption allegations have grown. The radio service provided by thegovernment-owned Malawi Broadcasting Corporation is the main source ofnews for the rural population. Television Malawi, the only national televisionstation, was launched in 1999 and is also owned by the government. In asurvey on worldwide press freedom conducted by an international pressuregroup, Reporters Without Borders, Malawi was ranked 84th out of 139 countries,placing it between Guatemala and Burkina Faso.

There are currently three Internet service providers (ISPs) in Malawi.MalawiNet, the country�s first ISP, had 3,500 subscribers in late 2000;Sustainable Development Network Programme, a UNDP-sponsored ISP, hasaround 1,500 subscribers; and Web and Internet Service Solutions (WISS) isthought to have a few hundred subscribers. ISPs charge between MK5 andMK15 per minute and, although service is improving, the servers are prone tocrashes. The number of Internet cafes has grown rapidly since 2000.

Several of the leading private-sector companies have websites, though most ofthe main parastatals do not. Online banking services have been launched overthe last three years, but are used by very few customers. Owing to the lack ofrelevant hardware and the poor telecoms infrastructure, along with high dial-upcharges, the Internet will be beyond the reach�and of no relevance�to the vastmajority of the population for the foreseeable future.

Energy provision

Fuelwood, both firewood and charcoal, is Malawi�s main source of energy. It isestimated that fuelwood provides about 91% of the total annual primaryenergy demand. Fuelwood demand was estimated at 18.37m cu metres in 2000,and is growing by around 6% per year. About 80% is consumed by households,the remainder being used by agri-industries, particularly for curing tobacco andtea. Fuelwood consumption has contributed to severe deforestation�the rate ofdeforestation is estimated at 40,000 ha per year. Land clearing for agriculture isalso reducing the amount of forest available for the sustainable harvesting offuelwood. The government is therefore promoting more efficient fuelwood use.

Malawi�s electricity supply is unreliable�17.6% of total energy generated in 2000was lost�mainly during the dry season. This not only causes inconvenience butalso seriously affects the industrial sector�many firms have had to acquiregenerators. Four new hydroelectric stations have opened on the Shire River since1989. Unfortunately, low water flow�owing to drought�and high silting havehindered their operation, and many experts now question the wisdom ofputting so much of Malawi�s electricity-generating capacity along the same river.

Internet provision

Wood is the main energysource

Electricity shortages

26 Malawi


Despite the increase in capacity, supply does not meet domestic demand. Therewere over 84,000 domestic consumers in 2002�many more tap into the gridillegally�accounting for about 20% of electricity sales. Industrial users accountfor around 60% of consumption and service industries make up the remainder.One of the underlying reasons for the inadequate supply is the low pricecharged by the state-owned Electricity Supply Commission (Escom), whichgenerates insufficient resources for investment and development. Electricitytariffs have been increased substantially in the last few years, but are still onlyaround two-thirds of the cost of production. Hopes to extend electrification toMalawi�s rural areas seem far-fetched in the light of Escom�s lack of funding andcapacity. Proposals for the privatisation of Escom�which involve splitting it intoseparate companies for generation, transmission, distribution and ruralelectrification�were put forward in September 1999, but progress on the saleitself has been very slow.

Escom is reported to be exploring the possibility of importing power fromMozambique to reduce its reliance on the hydroelectric plants on the ShireRiver. Building the 210-km power-supply link from Mozambique�s giant CahoraBassa dam would cost US$30m-40m, but seems to be the least expensive wayfor Malawi to diversify its power sources. Escom forecasts that Malawi�sdemand for power will increase by around 70% to 767mw by 2020. Phase oneof the Kapichira hydroelectric power scheme was finalised in June 2000�thecommissioning of phase two is still being finalised. Kapichira is expected to add128mw to the country�s current 215mw capacity by 2003. However, this will notbe enough to end the frequent power cuts, which are the fault of the powertransmission network.

The national demand for coal is estimated to be 74,000 tonnes/year. Productionat the Mchenga coal mine, Malawi�s sole producer of coal, is still below peakoutput owing to financial constraints, despite an increase of 25% in 2000 to55,000 tonnes. The remainder of Malawi�s coal is imported. Output rose afterthe privatisation of the Mchenga mine in 1999, which is estimated to havereserves of 2.3m tonnes; the surrounding area has a further 20m tonnes.Unfortunately Mchenga lies in the extreme north of Malawi, well away fromthe main centres of demand. In the long term, the government plans to developthe Lengwe Mwabvi fields in the lower Shire River valley in Southern region.

Malawi imports all of its petroleum. Because of good fuel depots built inTanzania, the northern transport routes of Dar es Salaam and Mbeya are themain supply routes, carrying almost 44% of Malawi�s fuel imports. Fuelimports via the ports of Nacala and Beira are set to rise in the coming years,but new fuel storage facilities will need to be developed to handle the increase.

In April 2000 the Petroleum Control Commission lost its monopoly onimporting fuel. On the advice of donors, this responsibility was taken over by aconsortium of oil companies, Petroleum Importers (comprising the OilCompany of Malawi, Mobil, Caltex, Total and Petroda). Fuel prices aredetermined by an automatic pricing mechanism which adjusts priceswhenever the import price in kwacha changes by more than 5%. A fuel retailer,Petroda, which is owned by Tanzanian investors, entered the market in 2000

Petroleum productsare imported

Inadequate coal production

Malawi 27


and sells fuel at a price below that set by the automatic pricing mechanism.Other fuel retailers have followed Petroda�s lead and competition is increasing.

The economy

Economic structure

Malawi�s population is highly dependent on agriculture. 85% of the populationare agricultural smallholders and their dependants; farming generates over 90%of export earnings and 35-45% of GDP. The staple crop is maize. Tobacco is by farMalawi�s largest export, accounting for around 60% of merchandise exportearnings. Other important exports are sugar and tea. Maize and tobacco aregrown throughout the country, whereas sugar and tea is produced mostly in thesouth. Commercial activity is concentrated in Blantyre in Southern region.

Main economic indicators, 2003a

Real GDP growth (%) 1.7Consumer price inflation (av; %) 11.6Current-account balance (US$ m) -151.0Foreign debt (US$ bn) 3.0Exchange rate (end period; MK:US$) 98.3Population (m) 12.1

a Economist Intelligence Unit estimates.

Source: Economist Intelligence Unit.

Comparative economic indicators, 2003a

Malawi Mozambique South Africa Zambia ZimbabweGDP (US$ bn) 1.6 4.3 156.1 4.9 4.8GDP per head (US$) 132.2 227.3 3,416 451.0 366.0Real GDP growth (%) 1.7 7.0 2.0 4.0 -13.6Consumer price inflation (av; %) 11.6 14.0 6.8 21.5 383.4Current-account balance (US$ m) -151.0 -565 b -1.5 -259 -501Merchandise exports fob (US$ bn) 0.4 0.8 33.0 1.0 1.3Merchandise imports fob (US$ bn) 0.6 1.3 c 28.5 1.0 1.8Foreign debt (US$ bn) 3.0 4.5 d 25.8 5.2 3.4

a Economist Intelligence Unit estimates. b Excluding transfers. c cif. d 2001.

Source: Economist Intelligence Unit, CountryData.

Economic policy

Since the early 1980s Malawi�s economic policies have been influencedsignificantly by the World Bank and the IMF, which have provided financialsupport for the country�s adjustment efforts. The focus of economic policy hasevolved, and the emphasis placed on large-scale agricultural and industrialdevelopment in the 1980s, which caused widening income disparities, has beenreversed. The main goal of economic policy is now to alleviate poverty.Strategies to achieve this have included the liberalisation of domestic markets,the privatisation of the parastatals that previously dominated the economy and

The IMF and the World Bank�son-going role

Agriculture is the mainstay ofthe economy

28 Malawi


improvements for smallholder farmers, including the liberalisation ofagricultural marketing arrangements. The economy�s reliance on agriculturemakes it highly vulnerable to weather conditions and changes in internationalprices for its export commodities.

Macroeconomic instability and high rates of inflation since the early 1990s,coupled with the sustained depreciation of the kwacha, have deterred private-sector investment. The fiscal deficit jumped to 15.1% of GDP in the 1994/95 fiscalyear (July-June), owing to drought and uncontrolled spending during the lastmonths of the presidency of Hastings Banda. This caused inflation to spiralupwards, and the liberalisation of the foreign-exchange market caused the valueof the kwacha to plummet from previously fixed levels. Under pressure fromthe international community the Muluzi government adopted austeritymeasures. A cash budget system, through which ministries were forced tospend no more than the amount allocated by the Ministry of Finance, wasintroduced in 1995. Although this helped to reduce the deficit to 2.9% of GDP in1996/97, fiscal discipline slipped in subsequent years and the IMF suspended itslending programme to Malawi in November 1997.

After the successful implementation of a staff-monitored programme, whichbegan in April 1998, the Fund approved a third annual enhanced structuraladjustment facility (ESAF) in December 1998. A new three-year poverty reductionand growth facility (PRGF, which replaced the ESAF) of US$58m was approved inDecember 2000. The PRGF formalised the objective of poverty reduction andemphasised fiscal policy reforms�through improvements in public expendituremanagement and prioritisation and tax policy reforms�as well as the promotionof private-sector development and investment. The policies contained in thePRGF support those in the poverty reduction strategy paper (PRSP). Producing aPRSP is a condition for receiving debt relief under the World Bank and IMF�sheavily indebted poor countries (HIPC) initiative and will set out a 3-5 yearprogramme for poverty reduction and growth. The success of the PRSP willdepend on whether the government is committed to its full implementation, orjust does enough to satisfy donors.

Malawi�s poverty reduction strategy paper

The primary objective of the PRSP is to achieve sustainable poverty reduction byempowering the poor. Not surprisingly, the PRSP emphasises the importance ofachieving macroeconomic stability, for which greater fiscal discipline is essential.Although diversification of the economy is a key objective, the PRSP acknowledgesthat for its three-year duration the agricultural sector will remain the principaldeterminant of growth and needs to be the focus of pro-poor policies. A three-pronged approach to agricultural development is outlined: increasing the utilisationof land, intensifying agricultural production and shifting to higher-value products.The success of each of these approaches depends on improving farmers� access tofinance and public services. Despite the government�s previous vacillations onprivatisation, a commitment to parastatal reform is included in the PRSP. TheHIV/AIDS epidemic has been identified as posing the greatest risk to the success ofthe PRSP, along with capacity constraints within the government.

Macroeconomic stability is apriority

Malawi 29


Since the 1998/99 budget (July-June) the government has based its expenditureallocations on a medium-term expenditure framework (MTEF), giving eachministry a rolling three-year resource envelope to be spent according tomedium-term strategies. Ministers have been given personal responsibility formaintaining spending at agreed levels and for ensuring that funds are allocatedto their intended areas. In addition, subsequent budgets have introducedexpenditure controls. However, these have had little effect on fiscal discipline,as the government has been unable to moderate spending in line with lowerthan projected revenue growth caused by sluggish real GDP growth andadministrative failures in tax collection. Continued unrestrained growth inexpenditure�particularly on non-essential items such as travel�pushed thefiscal deficit to 5.6% of GDP in 1999/2000 and 5.8% of GDP in 2000/01 and wasthe principal reason for the IMF�s decision to withhold PRGF funds in early2001. In the absence of IMF support (which caused other donors to withholdsupport) the fiscal deficit grew to 8.9% of GDP in 2001/02. Despite governmentcommitments, fiscal targets were again missed in 2002/03. However, as thecountry's economy appeared more and more likely to collapse, the IMFapproved the disbursal of US$9.2m in October 2003. In addition, interimassistance under the IMF/World Bank�s heavily indebted poor countries (HIPC)initiative of US$6.6m has been approved by the IMF Board. The IMF admittedthat Malawi had failed to meet most targets, but the Fund was very keen to givesupport, and claimed that their involvement in the drafting of the 2003/04budget was enough to start lending again.

Malawi�s financial arrangements with the IMF

Approval ExpiryApproved(SDR m)

Drawn(SDR m)

PRGF Dec 2000 Dec 2003 45.11 12.8ESAF/PRGF Oct 1995 Dec 1999 50.96 50.96Stand-by Nov 1994 Jun 1995 15 12.73

Source: IMF.

The finance minister, Friday Jumbe, unveiled the budget for fiscal year 2003/04(July-June) on July 4th .The government is relying on increased donor fundingto reduce the fiscal deficit to around 3% of GDP in 2003/04, from 8.4% of GDPin 2002/03. The projected increase in donor support to MK23.5bn (US$209m)from MK9bn (US$80m) in 2002/03 is the main factor behind the expected risein total revenue and grants to MK60bn, from MK41.4bn in 2002/03. As theEconomist Intelligence Unit assumes that IMF lending will resume before theend of 2003, triggering the release of budgetary support currently beingwithheld by bilateral donors, donor funding will increase, although probablynot by as much as the government is budgeting for.

The government appears to be relying on further good performance by theMalawi Revenue Authority to reach its target for domestic revenue. This may bedifficult to achieve, as the main tax change was a cut in surtax (in effect, value-added tax) from 20% to 17.5%. The coverage of the surtax was increased in the2002/03 budget so that it now covers the wholesale and retail sectors, as wellas the import and manufacturing sectors, and the rate was increased for anumber of goods previously taxed at 10%. However, many retailers raised their

Fiscal slippage causes donorsto suspend funding

The 2003/04 budget

30 Malawi


prices way beyond the level justified by the tax change, and others did notregister for surtax but still charged it to their customers. The government hopesthat the reduction in the surtax rate will result in lower prices for consumers,although unscrupulous retailers will no doubt attempt not to pass this on, usingthe fall in the kwacha against the US dollar to justify unchanged prices. Theonly other significant tax change was a reduction in the withholding tax onsupplies of goods and services from 10% to 4%. This is to be offset by thewithdrawal of exemption certificates, which have been exploited by somesuppliers. Again, this will do little to add to domestic revenue. Additionally, thegovernment�s real GDP growth projections of 3.4% in 2003 and 4.3% in 2004 areoverly optimistic, casting further doubt as to whether the budgeted revenuetotal can be reached.

The government projects that total expenditure will rise to MK56.5bn in2003/04, from MK53.9bn in 2002/03. The resumption of donor support and asatisfactory maize harvest will ease spending pressure, and the government haspledged to adhere to a number of new expenditure controls. Education, scienceand technology is allocated the largest proportion of revenue, MK8.8bn,followed by health and population, which gets MK4bn. Although much of thismoney is consumed by salaries, the government has increased the allocationfor pro-poor expenditure, from 6.4% of GDP in 2002/03 to 7% of GDP in2003/04. Those sectors that the government considers to be future sources ofgrowth have been given the greatest increase in their allocation. The Ministryof Commerce and Industry�s budget was increased by 140%, to MK270m, tofund activities promoting private-sector growth. The allocation for theDepartment of Mines was increased by 100% to MK70m, and the Ministry ofTourism was given MK169.5m to promote tourist activity. In addition, fundshave been allocated for the construction and maintenance of roads and for thepromotion of tourism. The government service charge on hotel, motel andlodge accommodation was also reduced from 10% to 5%.

Government finances(MK bn; fiscal years Jul-Jun)

2002/03 2003/04Budgeted Actual Budgeted

Total revenue & grants 43.15 41.43 59.97 Domestically generated 27.14 32.47 36.52 Donor funded 16.01 8.96 23.45Total expenditure 45.26 53.94 56.53 Recurrent 32.82 n/a 41.69 Development 12.44 n/a 14.84Balance -2.11 -12.51 3.44

Source: Ministry of Finance.

Monetary policy is conducted by the Reserve Bank of Malawi (RBM, the centralbank). Fiscal laxity has been the main cause of rapid growth in money supply,which has fed through into high inflation throughout much of the past decade,as the RBM lent to the public sector to cover any shortfall between revenue andexpenditure. M2 growth has fluctuated, falling in 2001, picking-up again in2002. and slowing again in 2003. Since November 1994 the central bank hasmarketed Treasury bills of varying maturities (91, 182 and 273 days). The T-bills

Monetary policy

Malawi 31


are used to finance government operations and assist the RBM in controllingmoney supply. In order to entice commercial banks to buy T-bills the RBMoffers a high yield on them, as a result of which most banks are reasonablyprofitable. Much bank lending is to the government and parastatals, usually ona short-term basis; there is little lending to private individuals, as thegovernment crowds the private sector out of the credit market.

The lack of competition in the banking sector has allowed banks to maintainwide spreads between lending and borrowing rates, harming private-sectorborrowing. The government has committed itself, in consultation with the IMF,to reforms which should reduce spreads, though ultimately this will require anerosion of the duopoly of the two main commercial banks. Nevertheless, asthings stand, real interest rates in Malawi are high; they averaged 28% over thelast three years. The banking sector has maintained a spread of up to 20percentage points between lending and borrowing rates. The IMF is alsoencouraging the RBM to lower the commercial banks� reserve requirement�currently 30%�to allow an increase in bank lending and therefore profitability,which would narrow the difference between lending and borrowing rates.However, reducing the commercial bank�s reserve requirement would increaseliquidity and inflationary pressure over the short term.

By end-June 2001, 42 parastatals had been privatised, realising about MK1.6bn(US$22m) since the start of the privatisation programme in 1995. Nonetheless,the pace of divestment has been slow�parastatals still employ 500,000 peopleand account for around 20% of GDP. For most of its lifetime, the PrivatisationCommission�the body responsible for privatising public enterprises�has facedlittle pressure from the government over how much money should be raisedfrom its disposals. Instead, efficiency gains and ending subsidies have beengiven greater priority. However, in July 2001 the government suspended theprivatisation programme because of concern over strategic areas of theeconomy being sold to foreigners, the job losses caused by and the inadequatefinancial yield of privatisation. Concern about loss of patronage and rent-seeking opportunities, though not voiced, were possibly a more importantreason for the suspension. After pressure from donors, the privatisationprogramme was restored in October 2001, but progress has remained slow.

Economic performance

Malawi�s real GDP growth has been highly variable, ranging from a contractionof 10.2% in 1994 to an expansion of 16.7% the following year. This is mainlybecause of the economy�s dependence on weather conditions and its effect onagricultural output. There has been little noticeable diversification in theproduction base�the industrial sector remains basic and has shrunk in recentyears owing to high real interest rates restricting investment. During the 1990sthere were two years when GDP declined dramatically as a result of drought,and other years when growth exceeded 10%, reflecting recoveries in theagricultural sector and smallholders� reactions to improved price incentives andmarket conditions. Between 1996 and 1999 real GDP growth averaged 4.6%, butfrom 2000 to 2002 it was only 0.6%, reflecting macroeconomic instability and

Privatisation has been slow

Fluctuating growth in the1990s

Banking sector competition

32 Malawi


repeated years of drought. With the average population growth rate at around2% per year, GDP per capita has been falling in recent years. The World Bankestimates that if poverty levels are to fall, economic growth rates in excess of 6%per year must be achieved. At present the economy is falling well short of thisand there is no sign that such a rate can be sustainably achieved.

Gross domestic product, 2002(% change)

Agriculture 2.3 Small-scale -0.4 Large-scale 13.4Manufacturing -4.2Electricity & water 6.3Construction 11.7Distribution 3.4Transport & communications 8.5Financial & professional services 6.4Total GDP at factor cost 1.8

Source: National Statistical Office.

Currency instability hit the economy again 2000, when the kwacha fell by over40% against the US dollar. This was in large part caused by lower revenue fromtobacco and higher fuel prices. As the effects of the slide in the exchange rateand the fuel price increase fed through, inflation rose from a low of 22.2% inJune to 35.4% in December, causing uncertainty among businesses and slowingthe rate of real GDP growth to 1.7% in 2000, according to the World Bank. RealGDP contracted by 1.5% in 2001 owing to drought, which hit the tobacco cropand caused a sharp fall in maize production, and the withholding of donorfunding. Average inflation fell back to 22.7% in 2001 as the fall in the kwachafell out of the annual comparison. A further drought combined with poorgovernment policy caused a severe famine in 2002, with the continuedsuspension of donor assistance also holding back growth. However, a jump inthe output of large-scale agriculture, owing to an increase in production bytobacco estates, meant that real GDP grew by 1.8% in 2002. A prompt donorresponse to famine resulted in a large distribution programme of free maize,allowing year-on-year inflation to slow throughout the year�food pricesaccount for 55% of the basket used to calculate the consume price index. Thebumper maize harvest recorded in 2003 allowed inflation to slow further; itreached just 8.7% in June, the lowest rate for nearly six years. Inflation began torise in the second half of the year owing to localised food shortages.

Regional trends

Malawi�s Southern region is the most densely populated and contains thecountry�s largest city, Blantyre. It is also the centre of commercial and industrialactivity. The capital, Lilongwe, lies in Central region, and the surrounding plainscomprise some of Malawi�s most fertile and productive agricultural land.Northern region, which is the poorest and least developed, is sparselypopulated; its only city, Mzuzu, is much smaller than Blantyre or Lilongwe.Each of the regions is the power base of one of Malawi�s three main political

Poor performance since 2000

Malawi 33


parties�the Alliance for Democracy (Aford) in the north, the Malawi CongressParty (MCP) in Central region and the United Democratic Front (UDF) in thesouth. Poverty is more prevalent in rural than urban areas, but incomeinequality is worse in urban areas.

Economic sectors

Agriculture

Agriculture is the most important sector of Malawi�s economy. Maize is thestaple food of the population and is grown by virtually all smallholders. Otherfood crops include sorghum, millet, pulses, root crops and fruit. Fish from LakeMalawi is also important in the subsistence diet. The main cash crops grown bysmallholders are tobacco (mainly burley), groundnuts, rice, cotton and maize.Large commercial estates specialise in Virginia (flue-cured) tobacco, tea, sugar,coffee, rubber and nuts. The estate farms occupy about 1.15m ha of leaseholdand freehold land. The land area occupied by estates expanded rapidly in the1970s and 1980s, but in 1990, as a condition of its agricultural adjustment loan,the World Bank stipulated that the government halt the transfer of land fromcustomary tenure by small-scale farmers to leasehold status. Liberalisation inthe mid-1990s allowed smallholders to produce cash crops. There was initially adramatic response in production levels, particularly for tobacco, increasing thecash incomes of smallholders and reducing their dependence on maize.However, smallholders remain very vulnerable to weather conditions, whichcan cause large shifts in their output.

Tobacco is Malawi�s most important export earner, accounting for between 50%and 70% of total annual earnings depending on production and prices. Inrecent years its importance has fallen as a result of the lower prices fetched atauction and static levels of production. In recent years sugar and tea haveaccounted for a combined 15-20% of exports. As governments (mainly indeveloped countries) are discouraging smoking, the diversification of exportcrops�to paprika, macadamia, citrus fruits, vegetables and cut flowers�isbeing encouraged.

The state-owned marketing authority, the Agricultural Development andMarketing Corporation (Admarc), has more than 50 main storage depots and agreater number of seasonal markets. Throughout the 1970s and most of the1980s Admarc had a stranglehold on small-scale producers, who were forced tosell to it at fixed prices. The corporation also had substantial interests in othersectors of the economy, although in accordance with donors� wishes several ofthese have since been sold off. Tobacco is now sold in Malawi for US dollars atopen auctions. Tea is also sold by auction, and this is increasingly taking placein Limbe, as opposed to London. Dwanga Sugar Corporation (DSC) and theSugar Corporation of Malawi (Sucoma) dominate sugar production andmarketing. Admarc lost its monopoly on grain purchases and exports in 2000,and its subsidiaries are gradually being sold off or liquidated. Owing to thesocial role that the company has, full privatisation is not planned.

Tobacco is the main exportcrop

Agriculture is vital

34 Malawi


The weather is the key determinant of maize production. Depending on if thereis a surplus or a deficit, maize is exported or imported. Drought causedproduction of maize�Malawi�s main food crop�to fall to just 1.3m tonnes incrop year 1996/97 (October-September), but output recovered to a record 2.5mtonnes in 1998/99, and this was then exceeded in 1999/2000. The governmentattributed the recovery in production to the increased use of modern farmingtechniques�partly as a result of the government�s distribution of free hybridseed and fertiliser under the �starter pack� scheme�and increased plantingacreage. Flooding in 2001 caused a decline in the 2000/01 harvest. Drought,combined with low producer and the sale of the strategic grain reserve, causedproduction to deteriorate even further in 2001/02, creating the worst famine foraround 50 years. Maize production in 2002/2003 rose to 1.98m tonnes, fromaround 1.5m tonnes the previous year. This was because of a 21% increase inthe planted area and a 5% increase in yield. The improved yield is the result ofthree factors: more conducive weather conditions, the wider distribution of freeseed and inputs via the starter pack programme, and donor provision of freemaize allowing farmers to use more for planting rather than consumption.Prospects for the 2003/04 harvest are less promising, partly because thegovernment is scaling back the starter pack programme (see below). Potentiallymore damaging is the low maize price�Admarc has reduced its retail price toMK10/kg (10 US cents/kg) in response to lower domestic prices. Private tradersare aware that they will be unable sell maize at much more than the Admarcprice, and will thus offer even less to the farmers from whom they buy.Another problem is the fall in the kwacha in the third quarter of 2003, whichwill increase the price of imported inputs, particularly fertilisers, which areessential for boosting maize production.

Agricultural reform has been an important part of World Bank-supportedstructural adjustment programmes from as far back as in 1981, and is part of thecontinuing programme of reform. Because the rural population could not affordthe production inputs necessary to increase food crop productivity, a donor-sponsored starter pack programme was introduced in 1998. The starter packs,containing seed and fertiliser, were distributed to around 2.5m smallholderfarmers. As well as leading to the record maize crops, the packs containedvarious other seeds, such as pigeon peas, to encourage farmers to grow cashcrops other than tobacco. Despite the success of the starter pack programme, itwas gradually reduced owing to cost overruns and concerns about encouragingdependency. However, after the onset of famine in 2002, donors agreed to fundthe distribution of starter packs to around 3m smallholder farmers. Assmallholder farmers are expected to have retained some grain for planting afterthe much-improved harvest in 2002/03, the government has scaled down thestarter pack programme to 1.7m smallholders for 2003/04.

Starter packs and maize production1999/2000 2000/01 2001/02 2002/03

Starter packs distributed (m) 2.8 1.5 0.9 3.0Maize output (m tonnes) 2.6 1.6 1.5 2.0

Source: Economist Intelligence Unit.

Weather is key determinant ofmaize production

Starter pack programme

Malawi 35


An inquiry into land reform, carried out in 1999, advocated the abolition offreehold land (to be substituted with 99-year leases in urban and rural areas),the return of control of customary land from the minister of lands to traditionalchiefs, and taxes on under-utilised estate land. The inquiry was particularlyconcerned about southern areas of the country, where claims by rural peasantsthat land had been stolen from them by the Banda regime led to violent riots inthe Mulanje tea-producing area in 1995. A new land policy, based on therecommendations of the inquiry, is currently before the country�s lawmakers. Itis controversial, as foreign owners of freehold land will have seven years tobecome Malawi citizens or have their freehold land revert to the state and bereplaced with 50-year leases. Alternatively, foreign owners can form apartnership with Malawians, with no limit on foreigners� holdings in thesearrangements. This should not disguise the fact that there is a genuine need forland reform in Malawi, and some pressing issues are being tackled. Inparticular, customary (tribal) land, which makes up the majority of ruralsmallholders� land, is to be recognised as private land under the new policy.This recognition will result in title deeds being given to the beneficiaries, givingthem the right both to borrow against the land and to pass it on to theirdescendants. In addition, the government is buying idle land for redistributionon a willing buyer-willing seller basis, although the exact criteria of who willbe resettled has yet to be determined. Political controversy, such as that whichhas accompanied the poorly handled land reform programme in Zimbabwe,should not arise because white-owned estates control only about 10% of theland. For these estate owners, the proposed land policy has meant that banksare now unprepared to lend to them if the land is used as collateral.

Tobacco, Malawi�s main export, is an important cash crop for smallholderfarmers and large estates Until 1990 smallholders were permitted to grow onlyfire- , sun- or air-cured varieties, which could be sold only to Admarc at fixedprices, whereas estates grew flue-cured (Virginia) and burley, which were soldat auction. In 1990, the government agreed to allow smallholders to produceburley tobacco, and over the next eight years burley production trebled, placingMalawi among the world�s largest producers of that variety. Since 1994smallholders have also been permitted to sell their crop to private traders andat auction. Tobacco export revenue peaked at US$338m in 1998, according to theTobacco Control Commission, and is estimated to have fallen to US$249m in2003. This is partly because farmers have reduced tobacco production anddiversified into alternative cash crops, but more importantly because priceshave fallen. Malawian tobacco prices have fallen much faster thaninternational tobacco prices. This is because of a reduction in the quality of thelocal crop�the result of a general reduction in the premium for producing goodquality leaf�and because of the failings of the intermediate buyers� system.Intermediate buyers were supposed to purchase tobacco from smallholderfarmers and allow savings through economies of scale in grading, baling andpresentation, but many of them lacked experience and guidance from theindustry was not forthcoming. A modified version of the intermediate buyers�system, the designated buyers� system, was used in the 2002 tobaccoauction season. Under this, only qualified and registered graders could gradeand price tobacco.

Tobacco

Land reform

36 Malawi


Production increased in 2002 owing to better weather conditions and anincrease in the production of flue-cured tobacco, which fetches a higher pricethan burley. Despite good growing conditions, burley production fell in 2003, asfarmers� concern about food security, following the famine in the previous year,made maize cultivation more pressing than the production of cash crops.However, output of the flue-cured crop rose further in 2003. The latter trend isexpected to continue, as tobacco merchants are encouraging Malawian farmersto step up their production of the flue-cured crop to compensate for thecollapse in the crop in Zimbabwe, owing to that country�s mishandled landreform programme. Differences in climatic and soil conditions with Zimbabweand the heavily labour-intensive nature of growing the flue-cured crop meanthat the maximum production is estimated at around 35 tonnes (comparedwith around 14 tonnes currently).

Tobacco exports(US$ m)

1997 1998 1999 2000 2001Flue cured 64.9 28.3 32.7 21.1 13.1Burley 246.8 179.5 208.7 206.3 188.0Sun/air cured 1.5 2.8 0.7 0.9 0.1Other 19.5 127.0 18.4 18.5 10.8Total 332.7 337.6 260.5 246.8 212.0

Source: Tobacco Control Commission.

Tobacco trading

The tobacco auction floor system is being undermined

Tobacco smuggling is a growing problem. This occurs because the trading systemused in neighbouring countries such as Mozambique and Tanzania differs from theauction system used in Malawi. In the former countries, tobacco is bought at buyingstations established by merchants at strategic points in the growing districts.Although the merchants have divided the countries up between them territorially,and operate within their own spheres, smallholders do get a better deal as they donot have to pay the associated costs of the auction system. As well as benefitingfrom a relatively low transport cost to market, the smallholder pays neither auction-floor charges nor the withholding tax on gross proceeds levied at the auction floors,which together cost the farmer 13.5% of the gross price.The buying issue is becoming particularly critical in the flue-cured tobacco sector,owing to the collapse of Zimbabwean flue-cured production. Tobacco merchants inMalawi have been keen to stimulate flue-cured production and have introduced twomain initiatives to achieve this:• they have encouraged existing flue-cured growers to plant larger areas and

former flue-cured growers to return by offering US dollar-denominatedproduction loans at concessional rates; and

• two of the three major merchants have entered tobacco production on theirown account.

These measures are placing major pressure on the tobacco auction system. As thetobacco merchants are now major producers in their own right, they argueconvincingly against the need to pass their own tobacco through the auction systembefore buying it back again to process. It is currently illegal for tobacco farmers to sell

Malawi 37


their tobacco to merchants in any other way than through the auction floors, but themerchants are pressing strongly for the tobacco auction system to be disbanded, atleast for flue-cured tobacco. If the requirement to sell flue-cured tobacco over theauction floors is lifted, it is likely to lead to the rapid collapse of the auction systemas a whole, as the next target for the merchants will be to take burley tobacco out ofthe system and operate rural buying. The greatest losers if the auction systemcollapsed would be the shareholders in Auction Holdings, the owners of the auctionfloors in Limbe, Lilongwe and Mzuzu, and the government, which will lose itsability to levy the withholding tax at source.

Malawi�s sole sugar producer, the Sugar Corporation of Malawi (Sucoma), hadrecord production of 260,441 tonnes in the 2002/03 season (July-June), up by20.9% on 2001/02 production, after several years of substantial investment andfavourable growing conditions. Malawi enjoys quota access to US and EUmarkets through several trade agreements. Since the mid-1980s domesticconsumption has risen at an average annual rate of 10%, but the influx ofcheap imports from Zimbabwe (taking advantage of that country�s parallelmarket exchange rate) is supplying a growing proportion of this demand. Mostsugar in Malawi is grown under irrigation.

Sugar exports1997 1998 1999 2000 2001

US$ m 23.9 50.3 23.1 39.2 46.1�000 tonnes 40.1 86.1 56.7 53.2 91.1

Source: IMF, Malawi: Selected Issues and Statistical Appendix, 2002.

Malawi is Africa�s second largest producer of tea after Kenya, which is grownon large commercial estates mainly around Limbe, south of Lake Malawi. Pricesare determined at auction in London or in Limbe itself (whose auctions haverecently been growing in importance). Again, weather conditions are the maindeterminant of tea production. According to the Tea Association of Malawi,production in the first seven months of 2003 was 30.2m kg, up by 8.2% on thesame period in 2002. Good growing conditions, particularly in the Mulanjedistrict, are the principal reason for this improvement. UK-based EasternProduce now accounts for around half of total production. The sector was givena further boost in mid-2003 by the sale of the Conforzi estate�one of theleading local producers�to a consortium of local Asian trading organisations,after several failed attempts. Conforzi had been in receivership for the previoustwo years, although it was being operated as a going concern.

Tea exports1997 1998 1999 2000 2001

US$ m 42.6 40.2 39.3 36.9 46.1�000 tonnes 39.8 40.5 47.0 40.0 38.4

Source: IMF, Malawi: Selected Issues and Statistical Appendix, 2002.

Fish from Lake Malawi is a major source of the population�s proteinrequirement, and the industry provides direct and indirect employment forabout 200,000 people. During the 1980s fish production per head fell by almost25% and exports fell from 140,000 tonnes in the mid-1980s to just 5,000 tonnesin 1989. Fish exports continued to fall precipitously in the 1990s; just three

Tea

Fishing

Sugar

38 Malawi


tonnes were sold in 1998, the last year that any output was exported. This is theresult of overfishing, declining water levels, pollution and illegal trawling. Thefisheries department is engaged in projects to promote sustainable fishproduction. The three littoral states�Malawi, Mozambique and Tanzania�agreed in 2001 to work out plans for the joint management of the resources ofLake Malawi.

Mining and semi-processing

Malawi has exploitable deposits of bauxite, asbestos, graphite and uranium,but, unlike its neighbours, has never developed large-scale mining activity.However, the government is now turning its attention to this sector. The MiningInvestment and Development Corporation (MIDC) explores the technical andcommercial viability of exploiting known mineral deposits, either with publicfunding or, where possible, in joint ventures with domestic or foreign investors.Malawi held its first mining conference in August 2000. In particular, thegovernment is targeting the development of bauxite deposits, estimated at 28mtonnes, on Mount Mulanje in the south. It is also keen to develop deposits ofaround 170m tonnes of titanium in Nsanje, on the country�s southern tip, andin Salima in Central region. Discussions are under way with Mozambique toexplore the possibility of selling the bauxite from Mount Mulanje for use at theMozal aluminium plant outside Maputo. However, it is estimated thatinvestment of around US$800m will be needed to develop the mine and thesupporting infrastructure. Nonetheless, the government has seen some rewardfor its efforts through MIDC�in 2000 an Australian company, PaladinResources, embarked on a uranium mining project at Kayelekera, in thenorthern district of Karonga, though the full feasibility study on the resourcewill not be completed until 2004. Ruby mining by a UK-listed firm, AgricolaResources, resumed at the Chimwadzulu mine near Ntcheu in 2001 after beingsuspended for several years because of thefts from the mine.

Minerals data, 1999/2000a

Production (tonnes) Value (MK �000)Coal 34,250 77,453Cement 155,054 690,380Lime 19,147 519Agricultural lime 2,724 534Terrazzo 666 1,780Aggregate 80,780 38,098Clay/pottery 719 64Salt 2,160 151,200Gemstones 16 2,841Dimension stone 78 532Sodium silicate 1,538 41,914Total n/a 1,005,315

a Fiscal year July-June.

Source: National Economic Council, Economic Report 2001.

Syracuse University of the US, with the support of international oil companies,will begin drilling into the bed of Lake Malawi in January 2003. The university

New oil exploration mayrevive commercial interest

Mining development targeted

Malawi 39


is drilling for research purposes, but the results will be useful to thegovernment and companies in assessing the prospects of finding oil in the lake.Lake Malawi has been examined before; a survey carried out in 1981 by DukeUniversity, also of the US, indicated the potential for oil�findings that wereconfirmed by further surveys, including one by the UK�s Shell (Mobil of the USalso expressed an interest). However, there has been no prospecting activitysince 1989, so the government is hoping that the new survey will revive theinterest of oil companies.

Manufacturing

There are around 100 manufacturing and industrial companies in Malawi,which together accounted for 12.1% of GDP in 2002. The country�s industryconsists mainly of agricultural processing, textiles, and the production ofclothing and footwear and building and construction materials. Manufacturingaccounts for roughly 85% of industrial activity and nearly one-quarter ofindustrial output is exported.

The highly concentrated ownership of Malawian industry is the economiclegacy of Hastings Banda, and the importance of the locally owned PressCorporation (PCL) to the economy cannot be overstated. PCL has varioussubsidiaries involved in manufacturing, brewing and distilling, agriculture andfinance, and its annual turnover is equivalent to about 10% of GDP. It also hasseveral joint ventures with foreign partners, including BP (UK), Carlsberg(Denmark) and the French insurer Axa.

Press Corporation: portfolio of businesses, end-2000Trading division Holding (%) Industrial division Holding (%) Investment division Holding (%)Hardware and General Dealers 100 Carlsberg Malawi Brewery 51 Commercial Bank of Malawi 23Malawi Pharmacies 68 Southern Bottlers 35 Limbe Leaf Tobacco Company 42Maldeco Fisheries 100 Enterprise Containers 100 National Bank of Malawi 48Oil Company of Malawi 50 Ethanol Company 58 Press Hall Steel (Holdings) 45Press Trading 51 Malawi Distillers 100 - -Press Transport 100 Press & Shire Clothing 100 - -Press Management Services 100 Press Clothing & Textiles 100 - -Press Produce 100 PGI 100 - -Sales Services 100 Central Poultry 100 - -People�s Trading Centre 50 Press Poultry 100 - -Metpress Zambia 50 National Poultry 50 - -Tambala Food Products 100 Press Foods 100 - -

Source: Press Corporation Limited.

The majority of PCL is controlled by Press Trust, a publicly registered trust; OldMutual Malawi holds 17.8% of PCL. Press Trust was founded in 1961 byDr Banda and became the basis of his vast personal fortune. After suffering afinancial crisis in 1980, Press Trust was eventually restructured (with donorsupport) in 1984, and the newly formed PCL took over responsibility for therunning of Press Trust�s diverse operations. Owing to widespread evidence thatpublic funds had been used to build up the company, the Muluzi governmentmoved to nationalise the conglomerate, and in January 1997 the Supreme Court

Stunted growth

Press Corporation

40 Malawi


allowed the state to take control. In March 1998 23% of the company wasfloated in a global depository receipt (GDR) on the London Stock Exchange (afigure that has increased to 27%). Unbundling of the company�s assets isnecessary, but few of them are likely to fetch a sufficient price for many boardmembers to countenance this�instead, an internal restructuring process hasbegun. A full listing on Malawi�s own stockmarket, including a partial sale ofthe government�s remaining stake, has been in the pipeline for several years butlittle progress has been made.

Malawian industry is based around agriprocessing and support for theagricultural sector, and is thus hit badly in drought years. The sector is heavilydependent on imported inputs, which means that successive depreciations ofthe currency have eroded gains in industrial competitiveness�conversely, theappreciation of the kwacha in 2001 caused an increase in capital goodsimports. Continued bouts of kwacha depreciation, high real interest rates andmacroeconomic instability create poor conditions for private-sector borrowingand therefore for new domestic start-ups. Despite low labour costs, labourproductivity is poor. Malawi�s workforce does not have the necessary skills andexpertise, and the HIV/AIDS epidemic is greatly affecting the industrialworkforce. Other constraints on the development of a vigorous industrialsector include high transport costs, poor infrastructural support, datedproduction techniques and the small size of the domestic market. In addition,regional trade agreements are increasingly forcing Malawi�s producers tocompete with neighbouring countries, which have more sophisticated andcompetitive industrial bases. These limitations generally outweigh the value ofthe range of investment incentives available from the Malawi InvestmentPromotion Agency.

Construction

South African firms undertook much of the building carried out in the 1970sand 1980s, particularly the construction of government offices in Lilongwe. Afew Malawian companies are capable of constructing high-quality buildings,and many small construction firms are able to erect small buildings to a lowstandard. The resumption of foreign aid to Malawi in 1993 renewed growth inthe construction industry, which had slumped in the early 1990s. According tothe National Economic Council, construction activity increased by an estimated26% in 1996 but after that it returned to growth rates of 2-6% per year until2000. Construction companies have been hit by high overhead andmaintenance costs as a result of frequent bouts of kwacha depreciation. Theconstruction sector has suffered as a result of the poor economic growth ratesof 2000-03.

Financial services

Malawi�s financial services, although developing, are basic and unsophisticated.The Reserve Bank of Malawi (RBM) is the central bank, and there are fivelicensed commercial operations, dominated by the National Bank of Malawi

Industry faces constraints

Rudimentary financial sector

Construction sector is weak

Malawi 41


(NBM) and the Commercial Bank of Malawi (CBM). The NBM does not haveany international shareholders or strategic links with a foreign partner, but a60% stake in CBM was sold to South Africa's, Standard Bank (Stanbic) in late2001. New banks have recently begun to enter the sector, which has been aspur to improving efficiency and diversifying the range of services available,but services remain poor on a regional basis. Intermediate financial institutionshave also begun to establish themselves; the first was Continental DiscountHouse, specialising in the interbank market. Loita Merchant Bank wasestablished in 1999 and National Insurance Company (Nico) has plans tobecome a merchant bank. Many of the country�s financial institutions are nicheplayers. Indebank, formed in 1972 with foreign and local participation, providesmedium- and long-term credit. Although the country�s financial market hasbeen liberalised, the mortgage finance institution, New Building Society (NBS),which came into operation at independence in March 1964, faces nocompetition. Nico acquired a majority stake in NBS in 2001 and intends to turnit into a commercial bank. A subsidiary of Indebank, the Investment andDevelopment Fund (Indefund), finances small and medium-sized enterprises.The state-owned Malawi Development Corporation services the needs of large-scale industry. The Post Office Savings Bank was restructured in 1994 andlicensed as a commercial institution, the Malawi Savings Bank. Other majorfinancial institutions include National Mercantile Credit, and Fincom (partlyowned by Nedbank of South Africa).

The Malawi Stock Exchange (MSE) was established in December 1994 butremained without listings until November 1996. Currently, there are nine listedcompanies: Blantyre Hotels, CBM, NBM, Nico, Old Mutual Malawi, PCL,Packaging Industries (Malawi), Sucoma and Sunbird Hotels. The South Africa-based financial services group Old Mutual completed its two-yeardemutualisation in July 1999, when it listed simultaneously on stock exchangesin Blantyre, Johannesburg, Harare, London and Windhoek. In Malawi 8,000policyholders were granted an average of 300 free shares each, which hasincreased private-investor awareness of the MSE.

Although there is increased domestic awareness of the MSE, this has not yettranslated into a full understanding of it by the private investor. The maininvestors are domestic pension funds and, given the lack of alternatives as wellas a young population, most Malawian investors are passive�once shares havebeen granted (or purchased) they hold on to them. As commercial investors dolittle trading, liquidity is low. During 2002 the all-share index fell by 18% (40% inUS dollar terms), but over the course of the MSE�s lifetime the index has fallenby over one-third and liquidity has remained very low.

All of the stocks to list so far have done so as part of privatisation deals; no firmhas turned to the market in order to raise finance. The sole stockbroker isStockbrokers Malawi�a licence for a second stockbroker, Nicorp, a joint venturebetween a local company, Nico Corporate Finance, and a Zimbabweanstockbroker, Trust Holdings, has been approved, but it has yet to start trading.As privatisation gathers momentum, the stockmarket is expected to see morebusiness and, in an attempt to stimulate the market, the National Investment

Fledgling stockmarket

A dearth of brokers

42 Malawi


Trust (NITL) was launched in late 2002. NITL, managed by First Merchant Bank,currently holds the government�s stakes in six companies; several of thesestakes are too small to list on their own on the MSE. The shares will beavailable to Malawian private investors only.

Other services

The growth of Malawi�s retail sector has been restricted by the limitedpurchasing power of Malawians. The main retail chain is the People�s TradingCompany, owned by PCL, and Metro of South Africa; Nico owns other largeshops. The entry of a South African chain, Shoprite-Checkers, in late 2001 hascaused a shake-up in the retail sector. Shoprite�s store in Lilongwe is thecentrepiece of the country�s first shopping mall, the 9,500-sq-metre Chichiricomplex, 70% of which is occupied by South African retailers. Shoprite hasbroadened the choice of goods available and lowered prices, which have beenmatched by established retailers. Unable to survive the competition, retailer,Import and Export Group, owner of the Kandodo chain, went into receivershipin mid-2002. Towns have numerous small shops selling fabrics, shoes, basicstationery and imported electrical equipment. These shops are mainly ownedand run by Malawi�s minority Asian population, which is estimated to controlmore than 30% of commercial activity. In keeping with the basic nature ofMalawi�s retail sector, a great deal of activity is informal, carried out by streetvendors selling a wide range of products.

The government is the largest single consumer in Malawi, and the CentralGovernment Stores Fund sells supplies to ministries and departments. Othersuppliers to the government include Government Press, for stationery andprinting, Central Medical Stores, for pharmaceutical products and medicalequipment, and the Plant and Vehicle Hire Organisation. Each of thesesuppliers is a candidate for privatisation.

The government has for a long time wanted to develop the tourism industryinto a major source of foreign exchange. Malawi�s attractions include a tropicalclimate, mountainous scenery and an inland sea. Although Malawi attractsvisitors from Europe and North America (many of whom are backpackers),those from South Africa and Zimbabwe are the mainstay of the tourismindustry. The main destination for tourists is Lake Malawi�the third largest lakein Africa and 11th largest in the world. Tourism grew rapidly during the late1980s from a small base, but there have been signs of a slowdown since the1990s�visitors increased from 182,000 in 1995 to 227,000 in 2000 (althoughonly around 25% of these were holidaymakers). Malawi�s image as a touristdestination has not been helped by reports in the international travel press ofharassment and robbing of tourists by local guides�a German tourist wasrobbed and murdered in May 2002�or by images of the famine that hasravaged the country. Tourism also suffers from perceptions of regionalinstability. Current efforts focus on increasing the number of hotel beds andimproving services, transport and tourism-related infrastructure; the latter is abig impediment to the industry.

New entrant boostscompetition

Hopes of a tourism boom

The government is the largestconsumer

Malawi 43


The external sector

Trade in goods

Foreign trade, 2002(US$ m)

Exports (fob) 422Imports (fob) -573Trade balance -151

Source: IMF, International Financial Statistics.

Three agricultural commodities account for nearly 90% of total exports: tobacco,tea and sugar. Although the volume of exports is determined mainly by theeffect of weather conditions on agricultural production, transport problemshave inflated the cost of imports (see Transport and communications). Exportgrowth was strong in the early 1990s, partly because of the incentives createdby the liberalisation of the quota system for smallholders� production of burleytobacco, and also because of large harvests after 1994. However, exports havedropped from a peak of US$537m in 1997 to an estimated US$422m in 2002,mainly owing to declining tobacco earnings and falling sugar prices. Textileexports have grown rapidly, and are now the largest non-agricultural export.The largest export market is the US, where much of Malawi�s tobacco isprocessed, followed by Germany and South Africa.

Direction of trade, 2002% of total

ExportsUS 17.2Germany 13.7South Africa 10.1Total incl others 100.0ImportsSouth Africa 44.0Zambia 12.6US 5.5Total incl others 100.0

Source: IMF, Direction of Trade Statistics.

Capital goods and industrial inputs comprise the majority of imports. In 1993and 1995 there were sharp rises in food imports because of the droughts of1992 and 1994�in 1995 an estimated 240,000 tonnes of maize was imported.Maize imports of 120,000 tonnes were required in 1998/99, and for the severefamine of 2002/03 around 433,000 tonnes of imports were required�although250,000 tonnes of this was provided by donors. South Africa is the chiefsource of imports, mainly because of Malawi�s long-standing transportproblems. According to the IMF, 44% of Malawi�s imports came from SouthAfrica in 2002, and Zambia was the source of 13%, although these statistics donot capture the large volume of unrecorded trade, estimated at 50% of thevalue of recorded trade.

Agricultural goods dominateexports

Capital goods and industrialinputs dominate imports

44 Malawi


Trade with South Africa(US$ �000)

1999 2000 2001Imports cifCoffee, tea spices 5,728 6,760 6,654Tobacco & manufactures 7,940 4,886 3,604Oilseeds 701 1,242 1,314Rubber & manufactures 812 1,298 959Wood & manufactures 717 709 737Cotton & manufactures 1,060 1,471 1,228Other fibres, yarn, cloth & manufactures 13,877 3,667 486Clothing 41,646 17,789 18,683Total incl others 76,018 40,794 37,266Exports fobFood, beverages & tobacco 30,765 37,360 38,611Mineral fuels 3,472 3,890 6,317Chemicalsa 46,573 44,255 42,441Rubber & manufactures 5,651 5,447 5,051Paper etc & manufactures 8,579 11,925 8,451Textile fibres, yarn, cloth & manufactures

incl clothing 6,695 9,068 7,050Iron & steel & manufacturesb 17,741 16,864 13,056Other metals & manufacturesb 4,275 4,645 4,699Machinery excl electrical 30,734 29,640 25,720Electrical, electronic equipment 18,080 13,343 17,706Road vehicles & tractors 30,345 37,976 31,608Optical, medical instruments, etc 3,827 3,064 2,459Total incl others 235,691 237,452 219,762

a Including crude fertilisers, manufactures of plastics and photographic goods. b Including scrap.

Source: Global Trade Information Services, World Trade Atlas.

Invisibles and the current account

Malawi has a structural deficit on its current account. This is mainly the resultof a high deficit on the services account, owing to the country�s landlockedstatus and the high transport costs for imported goods. Previously there werelarge discrepancies between figures from the Reserve Bank of Malawi (RBM; thecentral bank) and the IMF. However, the IMF has now published balance-of-payments figures in its, International Financial Statistics, and these differenceshave been reduced in most cases. According to the RBM, from 1994 to 1998 thevisible trade account fluctuated between small surpluses and deficits. A largerdeficit was recorded in 1999, which declined in 2000, 2001 and 2002, althoughthe deficit on the services account rose each year. By contrast, the 2002 IMFdata give a much more substantial deficit on the trade account and a smallerdeficit on the services account, although this is likely to be the result of food aidin 2002 that was not included in government estimates. Donor transfersproduce a regular surplus on the current-transfers account, although interestpayments on external debt keep the income account in deficit.

According to IMF figures, Malawi�s current-account deficit (including officialtransfers) fell from 10.5% of GDP in 1997 to 5.3% of GDP in 2000, owing to apick-up in private and official transfers. The withholding of some officialtransfers in 2001 caused the deficit to widen again, to 7.3% of GDP. Excluding

High services deficit hitscurrent account

Malawi 45


official transfers the current-account deficit has been over 10% for the past sixyears�it was 12.9% of GDP in 2001�and its movements are heavily influencedby fluctuations in tobacco exports. Because of the sharp increase in foodimports and their associated transport costs, the current-account deficitwidened to an estimated 11% of GDP (including transfers) in 2002.

Current account, 2002(US$ m)

Exports (fob) 422Imports (fob) -573Trade balance -151Net services -173Current-account balance -201


Capital flows and foreign debt

Malawi has received generous support from foreign donors to help finance itsstructural reform programmes, mainly in the form of loans. Although these areconcessional, the debt stock has risen much more rapidly than exports or GDP,jeopardising Malawi�s creditworthiness. At end-2001 total external debtamounted to US$2.6bn, according to the World Bank, compared with US$1.6bnin 1990.

Although Malawi has reduced its bilateral debt through Paris and London Clubrescheduling, this has not had a significant impact on the country�s overall debtstock, which is owed mostly to multilateral creditors. The various debt ratiosare still above critical levels. The debt/GNP ratio was 152% in 2001 and thedebt/exports ratio was 520%, according to the World Bank. Malawi�s debtburden drains foreign exchange, diverts budgetary expenditure from prioritysocial sectors, and widens the budget and balance-of-payments financing gaps.

In December 2000 Malawi reached decision point under the IMF and WorldBank�s heavily indebted poor countries (HIPC) initiative. This entitled it to reliefof US$1bn on debt service, equivalent to around US$643m in net present valueterms (this is 44% of the net present value of debt outstanding at the end of1999 after the full use of traditional debt mechanisms), which will save thecountry US$50m per year. A reduction of debt stock, granted at HIPCcompletion point, is not awarded until a country has successfully implementedan IMF programme for a year. Malawi will not reach this stage until late 2004.

Foreign reserves and the exchange rate

Liberalisation measures, contained in Malawi�s structural adjustmentprogrammes, have gradually transformed the country�s once highly restrictiveforeign-exchange system into a relatively open regime. The value of thekwacha, which was tightly controlled and highly distorted during the Bandaera, is now determined by a managed float. Officially, the exchange rate hasbeen floating freely since 1994, and the RBM intervenes in the foreign-exchangemarket only in order to realise its foreign-exchange reserve targets (required to

Debt ratios are critical

Liberal foreign-exchangeregime

46 Malawi


maintain import cover). However, in recent years threatened depreciations ofthe kwacha have been postponed by heavy interventions. Foreign-exchangeshortages occur in October-March (between the end of one tobacco auctionseason and the start of another). The foreign-exchange market is also subject tolarge fluctuations in aid flows.

The kwacha depreciated substantially in 1994 because the economy wasaffected by drought and the government's foreign-exchange reserves were low.From the beginning of 1995, however, the currency achieved a remarkabledegree of stability and remained relatively constant, at around MK15:US$1, from1995 to mid-1997. This stability suggested that a correction was due, and in thesecond half of 1997 the kwacha began a slow slide, reaching MK26:US$1 byJune 1998. The kwacha plummeted by over 50% in August 1998, to MK43:US$1,owing to poor tobacco export earnings and other devaluations in the region.Following the resumption of IMF assistance and a rebuilding of reserves, thecurrency remained relatively stable until May 2000, when another poortobacco harvest hit export revenue and caused the kwacha to fall to MK81:US$1by January 2001. The kwacha is prone to sharp depreciations around the endof the tobacco season (usually in September), as happened in 2000 and 2001;this was repeated again in 2003, when the kwacha fell by 19% between Julyand September, after disappointing tobacco harvests.

Exchange rates(monthly average)

May Jun Jul Aug SepMK:US$1 92.0 91.2 91.1 103.4 108.0


Between the mid-1980s and the mid-1990s Malawi had difficulty retainingadequate levels of foreign-exchange reserves. Because of the adverse effects ofdrought and the freezing of non-humanitarian aid, gross official reserves fellsubstantially during 1992-94 to an average of less than the equivalent of onemonth of imports. Careful management by the RBM helped build reserves upgradually, from just US$43m at the end of 1994 to US$226m by the end of 1996,the equivalent of more than four months of import cover. Reserves fell toUS$162m by end-1997 and dropped below US$150m in early 1998, setting thestage for the depreciation of the kwacha later that year. Following thedevaluation in 1998, however, reserves slowly recovered, and reached US$303mby March 2001. The suspension of donor inflows caused reserves to fall toUS$145m over the following 12 months. Famine-related inflows of foreignassistance pushed reserves to a high of US$218m in July 2002, but these weredrawn down to fund food reserves throughout 2002. Interventions to supportthe currency in 2003 have taken their toll, and foreign-exchange reserves werereported at US$114m in June 2003 (the latest data available). However, the dis-bursement of IMF funds in October will have helped to boost these by year-end.

Foreign-exchange reserves 2003Mar Apr May Jun

US$ m 122.3 119.0 115.8 113.6


Volatile foreign-exchangereserves

Malawi 47


Appendices

Sources of information

The main sources of statistical information in Malawi are the Reserve Bank ofMalawi (RBM) and the National Statistical Office (NSO); both produce data on amonthly basis. Although the NSO�s Monthly Statistical Bulletin contains moreinformation, the RBM�s Monthly Economic Review provides commentary onmost of the data it publishes. There is a problem with the timeliness of bothpublications, but the NSO publishes the inflation rate on or around the 20th ofthe following month. Most of the data used by the IMF in its monthlypublication International Financial Statistics is from the RBM and the NSO. Morein-depth information is contained in the RBM�s quarterly Financial andEconomic Review and in the National Economic Council�s annual EconomicReport, which is released at the same time as the budget. The NSO produced adetailed Statistical Yearbook, in late 2001, though a 2002 version appears not tohave been released yet. Various ad hoc reports are also available on the NSO�swebsite. IMF documents are produced on a fairly regular basis and tend tocarry some comment regarding economic performance and policyrecommendations; these are freely available from its website (see below).

Questions have arisen over the quality of the data produced by the Malawiauthorities, particularly national accounts data, which are based on the outputof only a limited number of producers in each sector. There is also aconsiderable difference between the current-account figures produced by theIMF and the NSO (see Invisibles and the current account). Another drawback isthe time it takes for preliminary figures to be confirmed as actual. Thegovernment and the RBM have committed themselves to improving thetimeliness and accuracy of official statistics under the IMF�s General DataDissemination System.

Government of Malawi, country presentation by Malawi to the Third UnitedNations Conference on the Least Developed Countries, February 2001

Ministry of Finance, Estimates of Expenditure on Development Account (annual),Zomba

Ministry of Finance, Estimates of Expenditure on Revenue Account (annual),Zomba

Ministry of Finance, Financial Statement (annual), Zomba

Ministry of Finance, Interim Poverty Reduction and Growth Strategy Paper�ARoad Map, August 2000

National Statistical Office, An Atlas of Social Statistics, Zomba, 2002

National Statistical Office, Monthly Statistical Bulletin, Zomba

National Statistical Office, Statistical Yearbook (annual), Zomba

National Economic Council, Economic Report (annual), Zomba

National statistical sources

48 Malawi


Reserve Bank of Malawi, Monthly Economic Review, Financial and EconomicReview (quarterly), Mid-Year Economic Report (annual), Lilongwe

International Institute for Strategic Studies, The Military Balance (annual)

IMF, Direction of Trade Statistics (quarterly); International Financial Statistics(monthly); Staff Country Report (occasional)

IMF, First review under the three-year arrangement under the poverty reduction andgrowth facility, and requests for waiver of performance criteria, extension andrephasing of the arrangement, and additional interim assistance under theenhanced initiative for heavily indebted poor countries, September 2003

IMF, Malawi: Selected Issues and Statistical Appendix, August 2002

IMF, Staff Report for the 2000 Article IV Consultation and Request for a three-yearArrangement Under the Poverty Reduction and Growth Facility, February 2001

IMF, Memorandum on the Economic Policies of the Government of Malawi,December 2000

IMF, Decision Point Document for the Enhanced Heavily Indebted Poor Countries(HIPC) Initiative, December 2000

IMF, Preliminary Document on the Enhanced Initiative for Heavily Indebted PoorCountries (HIPC), July 2000

OECD, Geographical Distribution of Financial Flows to Aid Recipients (annual)

UN Development Programme, Human Development Report (annual)

UN Food and Agriculture Organisation, Production Yearbook (annual)

World Bank, Malawi, Human Resources and Poverty: Profile and Priorities forAction, 1995, Washington

World Bank, Global Development Finance (annual)

http://www.aidsmalawi.org�National AIDS Commission of Malawi website;National Strategic Framework and relevant statistical information

http://www.malawi.gov.mw/finance/finance.htm�Ministry of Finance andEconomic Planning website; government policy documents

http://www.rbm.malawi.net�Reserve Bank of Malawi website; the bank�s lateststatistical publications

http://www.nso.malawi.net�National Statistical Office homepage; a limitedamount of up-to-date economic data

http://www.maform.malawi.net�Ministry of Information website; a widerange of information on the government, business and social sectors

http://www.mse.malawi.net�Malawi Stock Exchange website; datedinformation on the performance of the exchange and trading information

http://www.malawi.net�MalawiNet homepage; links to most of the country�smain sites

International statistical sources

Bibliography and selectwebsites

Malawi 49


http://www.malawi.gov.mw/finance/nec/nec.htm�National Economic Councilhomepage; access to various detailed economic reports

http://www.nation.malawi.net�The Nation newspaper�s website; updated veryirregularly

http://www.pcl.sdnp.org.mw�Press Corporation website, which featuresgeneral corporate information on the group

http://www.privatisationmalawi.org�Privatisation Commission website;detailed information on past, current and future privatisations

B Bafael, A Short History of Malawi, Popular Publishers, Limbe, 1980

C Crosby, Historical Dictionary of Malawi, Scarecrow Press, Lanham, MD, 1993

J Harrigan, From Dictatorship to Democracy, Ashgate Publishing, Aldershot, 2000

J Lwanda, Promises, Power Politics and Poverty: Democratic Transition in Malawi:1961-1996, Dudu Ngemba Publishers, Glasgow, 1996

M Mtewi, Malawi Democratic Theory and Public Policy, Schenkman Books,Rochester, Vermont, 1996

F Pryor, Political Economy of Poverty, Equity, and Growth: Malawi andMadagascar, Oxford University Press, Oxford, 1991

Reference tables

Populationa

1998 1999 2000 2001 2002Total (m) 10.79 11.09 11.37 11.63 11.87 % change, year on year 2.8 2.8 2.5 2.3 2.1

a IMF population figures are likely to be overestimated (see Population).

Source: International Monetary Fund, International Financial Statistics.

Employment, 1998(economically active persons aged ten and over; �000)

Agriculture, hunting & forestry 3,725Wholesale & retail trade 257Manufacturing 118Public administration 101Education 80Construction 73Fishing 41Transport, storage & communications 33Health & social work 32Other community service 25Real estate & business activities 9Electricity, gas & water 7Finance & insurance 5Mining & quarrying 2Total 4,509

Source: 1998 population census.

50 Malawi


Transport indicators(�000 unless otherwise indicated)

1996 1997 1998 1999 2000RailNet tonne-km 252 303 341 364 418Passenger-km 339 452 349 522 420LakeNet tonne-km 13 10 14 11 5Passenger-km 191 133 115 94 81Aira

Freight handled (�000 kg) 6,779 5,595 5,964 5,607 5,382No. of passengers 321 339 344 319 311

a Including transits; Lilongwe and Chileka international airports.

Source: National Statistical Office, Statistical Yearbook 2001.

Electricity supply1995 1996 1997 1998 1999

ConsumersPower 621 679 725 814 834General 11,943 13,078 14,481 16,004 16,888Domestic 43,703 47,691 50,576 54,875 59,321Total 56,267 61,448 65,782 71,693 77,043Units (�000 kw)Power 451,397 377,289 415,730 446,777 461,815General 120,100 120,837 126,628 126,351 129,120Domestic 157,331 170,354 196,318 225,648 252,152Exports 1,044 1,646 2,337 2,849 2,961Total 729,872 727,794a 741,013 801,625 846,048

a Does not sum in source.

Source: National Statistical Office, Statistical Yearbook 2001.

Gross domestic product by expenditure, IMF estimates(current MK m; % change in brackets)

1996 1997 1998 1999 2000Private consumption 34,396 36,874 48,302 69,784 80,064

(87.1) (7.2) (31.0) (44.5) (14.7)Government consumption 4,636 5,242 8,399 9,676 12,933

(13.9) (13.1) (60.2) (15.2) (33.7)Gross fixed capital formation 3,405 4,080 6,036 9,871 13,563

(7.6) (19.8) (47.9) (63.5) (37.4)Change in stocks 900 1,000 1,289 1,600 1,290

(63.6) (11.1) (28.9) (24.1) (-19.4)Exports of goods & services 8,322 9,658 18,022 21,569 26,277

(17.3) (16.1) (86.6) (19.7) (21.8)Imports of goods & services -15,204 -14,543 -20,729 -33,878 -36,968

(34.3) (4.3) (42.5) (63.4) (9.1)GDPa 36,454 42,310 57,319 78,622 97,159

(66.2) (16.1) (35.4) (37.2) (23.6)

a Does not sum in source.


Malawi 51


Gross domestic product by sector of origin(MK m at 1994 constant prices; % change in brackets)

1998 1999 2000 2001 2002Agriculture 4,490 4,944 5,130 4,811 4,922 (10.3) (10.1) (3.8) (-6.2) (2.3) Small-scale 3,520 3,992 4,055 3,862 3,846 Estate 969 951 1,075 949 1,076Manufacturing 1,717 1,749 1,696 1,456 1,394 (1.5) (1.9 (-3.0) (-14.2) (-4.2)Electricity & water 172 172 189 176 187 (7.2) (-0.0) (9.9) (-6.9) (6.2)Building & construction 253 293 286 273 304 (1.8) (15.8) (-2.4) (-4.5) (11.3)Distribution 2,811 2,760 2,752 2,782 2,878 (-6.6) (-1.8) (-0.3) (1.1) (3.5)Transport & communications 547 573 549 546 592 (-0.2) (4.8) (-4.2) (-0.5) (8.4)Financial & professional services 1,034 1,031 1,052 1,018 1,083 (-8.3) (-0.3) (2.0) (-3.2) (6.4)Ownership of dwellings 176 180 185 190 195 (2.1) (2.3) (2.8) (2.7) (2.6)Private social & community services 262 264 271 279 287 (0.8) (0.8) (2.7) (3.0) (2.9)Producers of government services 1,360 1,337 1,207 1,216 1,208 (-4.8) (-1.7) (-9.7) (0.7) (0.3)GDP at factor costa 12,645 13,092 13,117 12,582 12,808 (1.1) (3.5) (0.2) (-4.0) (1.8)

a Does not tally owing to unallocated finance charges.

Source: Reserve Bank of Malawi, Financial and Economic Review.

52 Malawi


Government finances(MK m)

1997/98 1998/99 1999/2000 2000/01 2001/02Revenue 8,598 12,075 15,808 20,880 22,658 Tax revenue 8,029 10,301 14,353 19,285 20,163 Direct taxes 3,510 4,816 6,590 8,740 9,333 Indirect taxes 4,738 5,762 8,075 11,074 11,262 Collection of arrears 0 0 120 0 9 Tax refunds & adjustments -218 -277 -432 -460 -373 Non-tax revenue 569 1,773 1,455 1,595 2,495Grants 1,968 4,242 6,296 10,353 9,429Total revenue & grants 10,567 16,316 22,104 31,233 32,092Expenditure 13,844 19,475 27,221 37,303 44,143 Current expenditure 10,940 13,952 17,638 25,772 33,157 Wages & salaries 3,204 3,209 4,296 5,954 8,687 Other purchases of goods &

services 4,553 5,315 7,043 7,696 10,851 Interest on debt 1,793 2,535 3,400 5,267 7,644 Subsidies & other transfers 1,390 2,525 2,624 6,173 5,818 Expenditure in arrears 0 368 276 616 118 Development expenditure 2,904 5,524 9,583 11,530 10,986Net lending 0 261 8 584 0Total expenditure & net lending 13,844 19,737 27,230 37,886 44,143Overall balance -3,277 -3,420 -5,125 -6,654 -12,050Financing 4,031 3,404 6,258 6,981 10,878 Foreign 1,616 5,794 4,373 5,580 1,019 Domestic 2,416 -2,390 1,886 1,401 9,859Discrepancy 754 -17 1,133 327 -1,173

Note. Data as in source.

Source: IMF, Selected Issues and Statistical Appendix, 2002.

Money supply(MK m unless otherwise indicated)

1998 1999 2000 2001 2002M1 5,036 6,706 9,198 10,014 12,739 % change, year on year 56.7 33.2 37.2 8.9 27.2Quasi-money 4,463 5,323 7,832 9,543 10,858M2 9,499 12,029 17,030 19,557 23,597 % change, year on year 60.3 26.6 41.6 14.9 20.7


Malawi 53


Interest rates(%; end-period unless otherwise indicated)

1998 1999 2000 2001 2002Reserve Bank rate 43.0 47.0 50.2 46.8 40.091-day Treasury bills 32.98 42.85 39.52 42.41 41.75Commercial bank prime rate 37.67 53.58 53.13 56.17 50.54Deposit savings 19.06 33.21 33.25 34.96 28.08Memorandum itemConsumer price inflation (av) 29.8 44.8 29.6 22.7 14.7

Sources: Reserve Bank of Malawi; IMF, International Financial Statistics.

Consumer prices(1990=100)

1998 1999 2000 2001 2002Urban 826.8 1,273.3 1,749.1 2,238.8 2,612.7 % change, year on year 34.4 54.0 37.4 28.0 16.7Rural 772.6 1,085.3 1,359.0 1,636.2 1,863.6 % change, year on year 28.1 40.5 25.1 20.4 13.9National 788.0 1,140.5 1,478.2 1,813.8 2,082.2 % change, year on year 29.8 44.7 29.6 22.7 14.8


Tobacco auction sales1998 1999 2000 2001 2002

Volume (�000 kg) 134,300 134,386 158,951 124,500 137,383Value (MK m) 5,032 8,094 9,467 10,451 12,224 US$ ma 162 184 159 145 159

a Converted at annual average exchange rate taken from IMF: International Financial Statistics.

Source: National Statistical Office, Monthly Statistical Bulletin.

Agriprocessing and manufacturing(% of total output)

1996 1997 1998 1999 2000Agriprocessing 43.8 46.3 41.7 41.8 43.2 Food 13.9 14.4 11.2 11.8 12.3 Beverages 14.5 14.2 13.4 13.4 14.3 Tea 3.7 4.0 2.9 2.5 2.6 Tobacco 2.9 3.2 2.7 2.8 2.9 Textiles, nettings & blankets 2.3 2.3 2.7 2.1 2.0 Clothing, leather & footwear 2.5 4.1 4.4 4.4 4.3 Sawmill & wood products 3.9 4.1 4.4 4.7 4.9Manufacturing 56.3 53.7 58.3 58.2 56.8 Packing materials, printing & publishing 12.2 14.1 14.8 15.7 13.7 Chemicals & fertilisers 6.0 5.3 6.2 4.3 3.8 Pharmaceuticals, paints & soaps 13.4 14.1 13.6 13.8 14.2 Plastic products & tyre retreading 4.0 3.6 3.5 2.4 2.4 Non-metallic mineral products 3.0 2.4 3.2 3.4 3.7 Metal products other than machinery 10.0 7.0 9.8 10.3 10.8 Machinery & motor vehicle assembly 4.5 3.9 4.0 4.3 4.3 Others 3.1 3.3 3.3 3.9 3.9


54 Malawi


Stockmarket1998 1999 2000 2001 2002

Indexa 220.68 250.89 269.94 280.15 236.02

a Local currency units; end-period.

Source: Malawi Stock Exchange.

Tourism indicators1996 1997 1998 1999a 2000a

Foreign visitors (�000) 183.8 207.3 219.6 254.3 227.6 % change, year on year 1.0 12.8 5.9 15.8 -10.5Room occupancy rate (%) 54.0 60.0 63.0 65.0 n/a

a Provisional.

Sources: National Statistical Office; Department of Tourism.

Principal export commodities(US$ m)

1997 1998 1999 2000 2001Tobacco 351.6 331.7 274.6 246.8 236.0Sugar 23.9 50.3 23.1 39.2 46.1Tea 42.6 40.2 39.3 36.9 46.1Coffee 12.7 10.5 8.9 5.2 5.3Cotton 11.6 5.0 5.3 7.0 4.6Maize 0.0 0.0 0.0 2.4 0.0Pulses 6.4 4.3 6.5 2.6 0.8Other agricultural 1.8 2.4 2.5 1.5 0.9Non-agricultural exports 73.6 63.2 56.2 55.7 59.9Re-exports 15.2 31.0 30.7 8.0 7.5Total 539.4 538.6 447.1 405.3 406.7

Source: IMF, Malawi: Selected Issues and Statistical Appendix.

Main trading partners(US$ m)

1998 1999 2000 2001 2002Exports to:US 59 69 54 77 69Germany 57 72 29 56 55South Africa 82 75 41 38 41Egypt 20 6 7 23 25Japan 42 21 46 33 24Netherlands 46 43 29 27 22Russia 3 7 8 10 19Total incl others 487 494 393 435 402Imports from:South Africa 239 258 260 241 261Zambia 51 66 63 69 75US 16 9 14 16 33India 15 16 18 20 25UK 24 31 18 13 22Total incl others 566 632 566 505 594

Source: IMF, Direction of Trade Statistics.

Malawi 55


Balance of payments, IMF estimates(US$ m)

1998 1999 2000 2001 2002Goods: exports fob 540 448 403 428 422Goods: imports fob -501 -575 -462 -472 -573Trade balance 39 -127 -59 -44 -151Services: credit 32 49 34 44 49Services: debit -162 -185 -167 -171 -222Income: credit 12 26 33 12 6Income: debit -48 -51 -51 -43 -45Current transfers: credit 134 138 143 149 170Current transfers: debit -11 -8 -8 -6 -9Current-account balance -4 -158 -74 -60 -201Direct investment in Malawi 12 59 26 19 6Other investment liabilities 226 161 163 194 128Financial-account balance 238 220 189 213 134Net errors & omissions -408 -29 -24 -222 157Overall balance -174 33 91 -68 90


Balance of payments, national estimates(MK m)

1998 1999 2000 2001 2002Goods: exports fob 16,735 19,712 23,925 30,798 32,302Goods: imports fob -15,442 -25,241 -27,414 -34,023 -43,905Trade balance 1,292 -5,528 -3,489 -3,225 -11,603Net services & unrequited personal

transfers -5,965 -7,223 -7,756 -9,606 -10,544 Non-factor services (net) -4,276 -6,428 -7,113 -8,020 -9,060 Factor services (net) -1,230 -1,185 -1,110 -2,303 -2,797 Private transfers -458 391 467 718 1,314Current-account balance -4,672 -12,751 -11,246 -12,831 -22,147Long-term capital (net) 8,821 9,892 13,821 19,463 16,672 Government transfers (net) 3,445 5,051 7,181 9,151 10,778 Government drawings on loans

(net) 3,932 2,856 6,286 9,838 4,949 Public enterprises (net) 1,332 1,828 140 215 670 Private sector (net) 112 159 214 260 276Net short-term capital 1,019 759 642 778 826Errors & omissions -11,070 3,262 2,167 -13,677 10,551Balance before debt relief -5,903 -1,162 5,384 -6,267 5,903Debt relief 63 58 0 820 2,244Overall balance after debt relief -5,965 1,104 5,384 -7,087 3,659Change in net foreign assets of

banking system (- indicatesincrease) -5,840 1,220 -5,384 -2,476 -3,223

Sources: National Statistical Office; National Economic Council; Reserve Bank of Malawi; Treasury.

56 Malawi


External debt, World Bank series(US$ m unless otherwise indicated; debt stock as at year-end)

1997 1998 1999 2000 2001Total external debt 2,228 2,444 2,751 2,716 2,602 Long-term debta 2,099 2,310 2,596 2,555 2,483 Short-term debt 23 32 67 78 46 Interest arrears on long-term debt 3 14 24 37 27 Use of IMF credit 106 102 88 83 73Public & publicly guaranteed long-

term debt 2,099 2,310 2,596 2,555 2,483 Official creditors 2,079 2,290 2,577 2,537 2,474 Multilateral 1,800 1,990 2,057 2,048 2,061 Bilateral 279 299 520 490 413 Private creditors 20 20 19 18 10 Banks 0 0 0 0 0 Bonds 0 0 0 0 0 Other private 20 20 19 18 10Total debt service 85 84 69 58 39 Principal 55 60 50 38 25 Interest 30 24 19 20 14Ratios (%)Total external debt/GNP 89 144 156 163 152Debt-service ratiob 14 14 13 12 8Short-term debt/total external debt 1 1 3 3 2Concessional long-term debt/total

long-term debt 86 90 90 90 93

a Long-term debt is defined as having original maturity of more than one year. b Debt service as apercentage of earnings from exports of goods and services.

Source: World Bank, Global Development Finance.

Malawi 57


Public and publicly guaranteed debt, end-1999Nominal Net present value

US$ m % of total US$ m % of totalMultilateral creditors 2,173 84 1,091 74 World Bank 1,603 62 757 51 African Development Bank 322 12 162 11 IMF 88 3 69 5 EU-European Investment Bank 96 4 66 4 International Fund for Agricultural

Development (IFAD) 50 2 26 2 PTA Bank (Comesa) 7 0 8 1 Nordic Development Fund 3 0 2 0 Arab Bank for Economic Development

in Africa 2 0 1 0 OPEC 1 0 1 0Bilateral creditors 424 16 388 26 Paris Club 342 13 310 21 Japan 295 11 274 19 Austria 20 1 16 1 France 14 1 10 1 Spain 8 0 6 0 South Africa 3 0 3 0 UK 1 0 1 0 Germany 1 0 1 0 Non-Paris Club official 41 2 34 2 China 36 1 30 2 Kuwait Fund 5 0 4 0 Commercial 40 2 44 3 UK 26 1 28 2 Netherlands 9 0 10 1 Spain 3 0 3 0 South Africa 1 0 1 0 Sweden 1 0 1 0 US 1 0 1 0Totala 2,597 100 1,479 100

a Public and publicly guaranteed debt.

Source: IMF, Malawi: Preliminary Document on the Enhanced Initiative for Heavily Indebted Poor Countries.

58 Malawi


Net official development assistancea

(US$ m)

1997 1998 1999 2000 2001Bilateral 174.1 203.6 227.7 269.2 195.8 UK 28.4 56.7 77.3 96.9 66.5 US 27.0 19.7 27.8 59.3 30.6 Denmark 17.7 22.6 28.4 24.9 21.6 Germany 32.8 25.5 28.7 25.5 19.8 Japan 35.1 47.4 34.0 38.5 18.3Multilateral 170.7 230.2 214.3 170.9 195.1 EC 28.5 75.7 89.0 48.9 65.0 IDA 98.1 119.7 74.6 81.2 106.6 ADF 29.5 15.0 30.8 16.1 8.2 UNICEF 3.3 2.9 4.1 3.9 4.3Total incl Arab countries 343.9 434.6 446.8 446.3 401.5 Grants 210.7 293.4 335.5 338.2 313.0

a Disbursements; official development assistance is defined as grants and loans, with at least a 25%grant element, provided by OECD and OPEC member countries and multilateral agencies andadministered with the aim of promoting development and welfare in the recipient country.

Source: OECD, Geographical Distribution of Financial Aid Flows to Developing Countries.

Exchange rates(MK per unit of currency; annual averages)

1998 1999 2000 2001 2002US$ 31.073 44.088 59.544 72.197 76.687SDR 61.789 63.736 104.332 84.571 118.467£ 51.469 71.343 90.275 103.964 115.130¥ 0.237 0.387 0.553 0.594 0.612�a - 46.970 54.858 64.606 72.173

a European currency unit (ecu) before 1999.


Foreign reserves(US$ m unless otherwise indicated; end-period)

1998 1999 2000 2001 2002Reserves excl gold 269.73 250.62 246.91 206.74 165.17Golda 0.54 0.54 0.54 0.54 0.51Total reserves incl gold 270.27 251.15 247.45 207.28 165.68Memorandum itemGold (m fine troy oz) 0.013 0.013 0.013 0.013 0.013

a National valuation.


Editors: Christopher Eads (editor); Angus Downie (consulting editor)Editorial closing date: January 1st 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected]

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