After an acute foreign exchange crisis, it is now hoped the introduction of tough new policies and the devaluation of the Malawi kwacha can restore aid flows and help turn Malawi’s fortunes around.
When Joyce Banda took the oath of office on 7 April, she inherited a seriously battered economy. A meltdown on the scale of the one that hit Zimbabwe after 2000 now seemed to be looming in Malawi. An acute shortage of foreign exchange (forex) was causing businesses to downsize or fold up, and shops were running out of stock. Motorists were spending nights at petrol stations queuing for fuel as the importing companies struggled to purchase the commodity because of the forex crisis.
The 78-year-old President Bingu wa Mutharika still had two years to complete his second term but seemed to be in an extraordinary hurry to destroy the economy, spending much of his time accusing donors of meddling in his policies. Then, on 5 April, he suffered a fatal heart attack in his office in the capital, Lilongwe. Given the state of the economy, it wasn’t uncommon to hear some “good riddance” remarks in reaction, even among respected economic pundits. “In our culture, we don’t celebrate death but I wouldn’t say Bingu’s death wasn’t good for our economy,” said a prominent local economist, opting for anonymity.
Mutharika had stepped up to the plate in 2004, posing as an ‘economic engineer’ well equipped to fix an economy damaged by the corruption, lack of fiscal discipline and collapsed donor confidence under his predecessor, President Bakili Muluzi. A one-time loans officer at the World Bank, with substantial experience of regional organisations in Africa, Mutharika had corrupt public officers arrested, including some in the cabinet. He instituted reforms to enhance public finance management and introduced economic-growth initiatives inspired by a Malawi Growth and Development Strategy, whose vision was to transform the country from a predominantly importing and consuming economy to a manufacturing and exporting one.
The centrepiece of Mutharika’s policies was the farm input subsidy programme through which up to 1.7 million vulnerable small-scale farmers were able to access fertiliser and seeds every year at a heavily subsidised price. With the eradication of hunger, the president’s policies generally endeared Malawi to donors who poured in their aid. The administration also invested the money saved from debt relief in economic growth and social services. In 2009, the economy grew by 9 percent and the Economist Intelligence Unit named Malawi as the second fastest growing economy in the world after Qatar.
Throughout his first term in office, Mutharika had led a minority government, which battled against strong opposition in parliament, but in 2009 his impressive economic performance earned him a landslide victory at the polls. Public policy analyst and lecturer at the University of Malawi, Blessings Chinsinga, noted that while the election rewarded him for his achievements, it also gave him ammunition to destroy Malawi. “The major reason we have become this terrible is because power got into his head after this election,” he said.
Riding on a two thirds parliamentary majority, Mutharika amended laws to tighten his grip on power and threatened to ban some newspapers. At the same time he loosened up on fiscal discipline, spending $20 million on a presidential jet that costs a reported $340,000 annually to maintain. Corruption and nepotism took hold.
As the general political environment became increasingly stifled, displeased donors began to withhold their support to the budget – about 40 percent of which constituted aid. The government pegged the value of the Malawi kwacha to the dollar and persistently resisted calls from the International Monetary Fund (IMF) to devalue the currency and allow it to float. Forex became increasingly scarce as Malawi’s major export commodity, tobacco, continued to perform poorly.
Apparently anticipating a further withholding of aid, Mutharika experimented with a ‘zero deficit’ budget for the year 2011/12, in which all recurrent expenditures would be financed by domestic revenue. But to collect that revenue, the government had to introduce heavy and multiple taxes that were passed on to the consumer and crippled businesses. The budget experiment was seen to be a flop, and Mutharika’s former popularity evaporated overnight.
But now optimism is creeping in. The new president has repealed the laws that infringed on the rights of citizens and displeased donors, and has announced that she will abandon the zero deficit budget. She has also devalued the local currency by 33 percent. A financial economist, Max Honde, told the Blantyre paper the Daily Times that the devaluation was necessary, although it would hurt consumers. “We have to pay the price as we correct the situation. Something had to give in to put our economy back on track,” he said.
Following the devaluation, the IMF was quick to restore a credit facility worth $157 million over three years. Tobacco prices have responded too, picking up from an average $0.81 per kg before the devaluation to about $3 per kg, raising prospects of a reasonable forex return. But all imported commodities and services are seeing sharp price rises, which are unlikely to be compensated for by planned salary increments for civil servants and others.
To help stabilise the economy, Britain, which had previously withheld aid, announced currency support worth just over $50 million. During a three-day visit in May, UK secretary of state for international development, Andrew Mitchell, said the money would help to cushion the shortage of forex and help get Malawi ba,k on the path of sustained growth.
The fuel situation is also stabilising, aided by emergency donations from South Africa, Zambia and Mozambique. And confidence among the business community is returning, according to the president of the Malawi Confederation of Chambers of Commerce and Industry (MCCCI), Ma-thews Chikankheni. “We are hopeful this good beginning will carry on… External funding is necessary to fill our financial gaps. This is a reality of life,” he said.
But President Banda is not promising a quick fix. “It will take time for our economy to get back on track, but we will do the right things in the book to get it back on track,” she said.
