Malawi WT/TPR/S/96
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I. ECONOMIC ENVIRONMENT
(1) MAJOR FEATURES OF THE ECONOMY
1. The Republic of Malawi is a landlocked country situated in Southern Africa, comprising an
area of almost 118,500 square kilometres;  it is bordered by Zambia, Tanzania and Mozambique.  The
population of Malawi was estimated at 11 million in 1999 (Table I.1).  Over three quarters of
inhabitants live in rural areas.  The capital, Lilongwe, has about 400,000 people.  Malawi is one of theworld's poorest least-developed countries, with a GDP per capita of US$180-200 in 1999.  Around
half of the population lives below the poverty line, and severe health problems, especially the
HIV/AIDS pandemic, compounds immensely Malawi's development problems.  Most social
indicators are extremely poor relative to sub-Saharan Africa.
Table I.1
Main economic and social indicators
Area 118,485 sq. km. Urban share of population (1999) 24%
Population (1999) 11.0 million Nominal GDP at current market prices (1999) US$1,810 million
Annual population growth (1993-99) 2.6% GDP per capita (1999) US$180
UN human development index (1999) GNP per capita annual growth rate (1989-99) 1.0%
- Overall ranking 151 Nominal GDP at current prices (1999), of which: MK 79,804 million
- Category Low human
development- Mining and quarrying 1%
- Ranking within category 25th - Agriculture, forestry and fishing 38%
UN human poverty index in
developing countries (1999)- Manufacturing 14%
- Overall ranking 74th - Services 47%
- Within category 15th Enrolment ratio in education (1999) 73%
Life expectancy at birth (1993-99) 39 years
Infant mortality rate per '000 (1998) 132
Adult literacy (1999) 59%
Source : UNDP (2001), Human Development Report 2001;   World Bank (2001), World Development Indicators 2001;
IMF (2001), "Malawi:  Selected Issues and Statistical Appendix", Country Report No. 01/32, January 2001[Online].  Available at:   http://www.imf.org/external/pubs/ft/scr/2001/cr0132.pdf.
2. Merchandise exports and imports averaged 27% and 47% of GDP, respectively, in 1999;
these are down substantially from corresponding 1994 levels of 30% and 67% (Chart I.1), and remain
relatively low by international levels, especially for exports.  Despite efforts to diversify exports away
from traditional commodities, such as tobacco, tea, sugar, and coffee, these still account for almost
four fifths of merchandise exports, albeit well down from almost total dependence in the early 1990s.
Tobacco remains the predominant export.  Non-traditional exports have grown slowly.  The
agriculture sector supplies almost all of Malawi's exports, and accounts for 38% of GDP.  Despite
ambitious plans to substantially increase the relative size of the manufacturing sector, it has generally
stagnated and contributes about 14% of GDP.  Services are the main component of the economy,accounting for some 47% of GDP.WT/TPR/S/96 Trade Policy Review
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010203040506070
1994 1995 1996 1997 1998 1999Source:  IMF (2001), "Malawi: Selected issues and Statisti cal Appendix", Country Report No. 01/32, January.Chart I.1
Merchandise trade as a share of GDP, 1994-99
Per cent
Import
Export
3. Malawi is a highly indebted poor country (HIP C).  External debt stood at US$2.6 billion in
1999, up from US$2.1 billion in 1994 (Table I.2).  Most debt is medium to long term and of a
concessional nature;  it is overwhelmingly held with multilateral institutions, especially the
World Bank, the African Development Bank, and the IMF.1  External debt worsened to chronic levels
during the 1990s, and currently substantially exceeds GDP, by about 50%.  Because of the highreliance on concessional debt, Malawi's debt service as a ratio of exports is relatively low,
representing about 18% of exports in 1999, still below 1994 and 1995 levels.  However, it had
accumulated substantial arrears, of approximately US$12 million at end-October 2000.
2  About 80%
of Malawi's bilateral debt is with Paris Club members and has been restructured.  Following the
presentation of an interim Poverty Reduction Strategy Programme (PRSP) by Malawi, its bilateral andmultilateral donors have also agreed to extend debt relief amounting to US$1 billion, commencing
2001, under the Enhanced Heavily Indebted Poor Countries (HIPC) Initiative.
3
4. Malawi is finalizing its PRSP in collaboration with its multilateral donors (Chapter II).  This
is expected to be approved by Parliament later in 2001.  The strategy focuses on improving fiscal
discipline, governance, and public-sector efficiency.
                                                     
1 Malawi's main bilateral donor is Japan.
2 Most, US$8.2 million, was owed to the PTA Bank, US$0.4 million to South Africa, and
US$3.3 million to commercial creditors (IMF, 2000).
3 Malawi has also requested its non-Paris-Club bilateral creditors, Kuwait and China, to provide debt
relief under this initiative.Malawi WT/TPR/S/96
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Table I.2
Public external debt, 1994-00
(MK million, unless otherwise indicated)
1994 1995 1996 1997 1998 1999 2000a
External debt (US$ million) 2,083.0 2,081.0 2,156.0 2,259.0 2,479.0 2,608.0 2,615.0
Multilateral 1,709.0 1,767.0 1,863.0 1,893.0 2,091.0 2,187.0 ..
Bilateral 341.0 289.0 269.0 370.0 358.0 421.0 ..
Other (commercial) 33.0 25.0 23.0 21.0 30.0 36.0 ..
External debt as a per cent of GDP .. .. 90.1 97.1 142.7 144.1 154.0
External debt service ratio (as a
per cent of exports)24.8 22.2 16.8 15.3 18.2 17.7 20.1
.. Not available.
aP r e l i m i n a r y .
Source : IMF (2001), "Malawi:  Selected Issues and Statistical Appendix", Country Report No. 01/32, January [Online].  
Available at:  http://www.imf.org/external/pubs/ft/scr/2001/cr0132.pdf.
(2) RECENT ECONOMIC DEVELOPMENTS
5. Malawi faces immense developmental challenges.  Its continued dependence on a few
primary commodities poses particular policy challenges for the Government, and makes
macroeconomic and structural policy reforms crucial in the face of the economy's vulnerability to
international conditions.  The economy remains rudimentary, and agricultural land resources, the coreto future growth, suffer from over intensive use, soil degradation, and deforestation.  Malawi has
limited natural resources.  Government trade-related policies have changed enormously since the mid
1980s from those of post-independence, which centred on import substitution and other interventionist
measures, including state ownership, to promote industrialization.  Reinforced by subsequent
structural adjustment programmes, deepening reforms continued from the mid 1990s.  These centredon reducing the restrictiveness and complexity of the trade regime and promoting greater integration
through bilateral, regional, and multilateral agreements.  Wide-reaching structural reforms included
trade liberalization, exchange rate flexibility and, albeit currently suspended and subject to review,
privatization.  Nevertheless, persistent structural problems, compounded at times by inappropriate
stabilization policies, especially expansionary fiscal policy, have fuelled a volatile appreciating realexchange rate, high inflation, and exorbitant interest rates.
6. The economy remains precariously poised, facing a weak trading environment and uncertain
developments.  Growth has slowed substantially since 1996, from 8.6% to an estimated 1.7% in 2000
(Table I.3).  Inflation, reduced to 9% in 1997, subsequently accelerated to 45% in 1999, but fell to
30% in 2000.  The national currency (the Malawi kwacha) has depreciated nominally since 1996 by
around 300% against the U.S. dollar by end 1999, and by a further 100% during 2000.  More recent
data in 2001 indicated that renewed stabilization policies have begun to work, helping to stabilize thecurrency (appreciating slightly, nominally) and to re kindle growth, although still subdued by high real
interest rates, to around 3% annually.  While international reserves rose from 2.6 months of
prospective imports in 1997 to well over four months in 2000, Malawi's external position remains
fragile and heavily dependent on official transfers.
7. Sustained overall economic reforms are needed to reduce supply-side constraints and other
bottlenecks in the economy, including poor infrastructure; otherwise Malawi will be unable to benefit
from recent initiatives by major trading partners to enhance its preferential market access, such as the
United States' African Growth and Opportunity Act, and the EU's "Everything But Arms"
arrangements for least developed countries (Chapter II(5)).  Although foreign aid, which has more
than doubled in real terms from US$64 million in 1975 to US$470 million in 1998, can help it alsoWT/TPR/S/96 Trade Policy Review
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has serious drawbacks that may complicate economic management and undermine policy reforms,
with possible adverse effects on economic growth.4
Table I.3
Economic performance, 1996-00
1996 1997 1998 1999 2000a
US$ million
GDP at current market prices 2,392 2,327 1,752 1,810 1,698
Malawi kwacha million
Nominal GDP 36,595 42,357 54,491 79,804 101,022
Real GDP (1994 prices) 12,826 13,641 13,908 14,390 14,634
Annual percentage change (in domestic currency)
Real GDP growth 8.6 6.4 2.0 3.5 1.7
Per cent
Inflation (CPI) 37.7 9.1 29.8 44.8 29.6
Interest rates
- Commercial savings deposits 13.0 10.0 25.0 30.0 ..
- Treasury bills (182 days) 15.1 20.0 48.0 39.6 ..
- Term deposits (3 months) 12.0 10.0 28.5 33.0 ..
Broad money growth (M2) .. 2.2 55.6 33.6 42.4
Per cent of GDP
Government deficit -5.6 -2.9 -8.2 -5.5 -5.0
- Revenue (including grants) 25.5 21.1 18.4 24.0 24.6
- Expenditure 31.2 23.9 26.6 29.5 30.1
Balance of payments
- Trade -5.9 -10.5 -2.3 -12.5 -9.6
- Current account (including grants) -7.7 -10.5 -2.5 -8.3 -4.8
- Capital account 12.2 9.2 7.6 9.3 4.1
- Overall balance 4.8 -2.1 0.5 0.9 -0.7
Memorandum items
International reserves
- US$ million 218 155 258 244 243
- Months of non-mineral imports (c.i.f.) 3.0 2.6 4.0 4.5 4.4
.. Not available.
aP r e l i m i n a r y .
Source : IMF (2001), "Malawi:  Selected issues and Statistical Appendix", Country Report No. 01/32 [Online].  Available
at:  http://www.imf.org/external/pubs/ft/scr/2001/cr0132.pdf.
8. The Minister of Finance and Economic Planning announced in March 2000 a ten point
economic plan aimed at macroeconomic stabilization.  It recognized that expenditure controls were
needed to reduce inflation and interest rates.  The plan included measures to curtail budgetary
spending, including more effective control of parastatals, and to make monetary policy more effective
and transparent by further "entrenching" the independence of the Reserve Bank and achieving better
                                                     
4 Foreign aid to Malawi has contributed to increased consumption rather than investment, thus fuelling
inflation and macroeconomic instability.  It may also have delayed or undermined the implementation ofeconomic reforms.  Studies have shown that only countries that continue to implement substantial policyreforms benefit from foreign aid.  Foreign aid to Malawi rose from 9% of GDP in 1975 to 26% in 1998, makingit the second most aid-dependent in Africa after Mozambique.Malawi WT/TPR/S/96
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coherence with fiscal policy.  Refundable surtax revenue will be retained in a special account with the
Malawi Revenue Authority.
9. Malawi's economic crisis has been due partly to inconsistent stabilization policies, especially
expansionary fiscal measures, which have created unsustainable budget deficits.  The Government's
commitment to reign-in fiscal deficits wavered temporarily in 1998 when these increased from 2.9%
of GDP to over 8% (Table I.3).  Since then, b udget deficits have been reduced, to around 5%.
However, despite these improvements, the fiscal position remains weak, aggravated by expenditure
overruns, debts incurred by parastatals, such as the National Food Reserve Agency (NFRA), and
mounting government arrears.5  Public expenditure increases since 1997 to currently over 30% of
GDP have substantially outpaced revenue growth.  Inept stabilization policies have contributed to
Malawi's economic difficulties, accentuated by external shocks, including falling commodity prices,such as for tobacco.  Further fiscal slippage woul d limit Malawi's capacity to absorb such shocks and
further deterioration in its terms of trade.
10. Fiscal discipline has been impaired by a lack of budgetary checks and controls.  Budgets are
often premised on  expenditure and revenue projections based on overly optimistic assumptions on
macroeconomic indicators, such as inflation and GDP growth.  Moreover, since 40% of the budget isfinanced by foreign aid, revenue projections are heavily affected by variations in assistance levels,
which are subject to donors' decisions.  Greater transparency and accountability in budgetary
management would benefit the economy.  Expenditure controls are being addressed, including by
providing more effective monitoring and control of parastatal activities, essential for fiscal discipline.
Borrowings by the NFRA and by the Agricultural Development and Marketing Corporation
(ADMARC), for example, have been curtailed, and the financial operations of all parastatals put
under the control of the Parastatal Enterprise Reform and Monitoring Unit established in the Ministryof Finance and Economic Planning.  A parliamentary committee on parastatals is also scheduled to be
established in 2001 to help improve their management and financial discipline, and the monitoring
and supervisory role over parastatals by the National Audit Office is to be intensified.  Expenditure
cuts, equivalent to about 0.5% of GDP, were approved in April 2001.  An Integrated Financial
Management and Information System is being implemented in conjunction with public expenditurereviews and a medium-term expenditure framework;  it provides for new procedures for monitoring
spending allocations to ministries, including improvements to the system of allocating funds using
credit ceiling authorities. Improved revenue collec tions are also expected following the formation of
the Malawi Revenue Authority in February 2000, and the extension of the surtax to wholesale and
retail levels as announced in the 2000 Budget.
11. Monetary policy, until very recently, has generally accommodated expansionary fiscal
deficits.  Broad money supply growth accelerated in 1998 from 2% to 56%, and although checked
slightly to 34% in 1999, rose again in 2000 to an estimated 42%.  This fed inflation, which peaked at
45% in 1999, and was 30% in 2000.  Initial targets (set by the Reserve Bank) of 10% inflation rate
and a reserve money growth of 12% during 2001 proved unachievable, and the targeted inflation ratehas subsequently been revised upwards, first to 14%  and now to 20%.  The annual inflation rate at
July 2001 was 26%.  High real interest rates, inflationary expectations fuelled by past "stop-start"
monetary policies, cost-push pressures induced by the substantial currency devaluations, and the
Government's excessive borrowing requirements have also been recorded.  Sustainable reductions in
interest rates are unlikely while such government borrowings continue to strain the banking system
and to "crowd out" the private sector.  High interest rates also reflect wide bank margins, partly due to
                                                     
5 The precise magnitude of government arrears is unclear.  Although pre-June 2000 arrears, estimated
by the Auditor-General at MK 554 million, have been cleared, new arrears have accrued.WT/TPR/S/96 Trade Policy Review
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the high non-remunerated reserve requirements imposed on commercial banks by the Reserve Bank.
Non-performing loans held by the bankin g system also aggravate the problem.
12. The Reserve Bank has improved its liquidity management through greater reliance on market
operations using a range of monetary instruments.  To improve monetary management, the Monetary
Policy Committee of the Reserve Bank was established in 2000 to monitor monetary conditions and to
publish operational monetary targets.  Efforts have also been made to limit the extent of publicborrowings from the Reserve Bank.  The Government's borrowings from the Reserve Bank are limited
to 20% of the annual budgeted domestic revenues.
6  Such limits have not been exceeded so far.
13. Malawi established a fully flexible and market-determined exchange rate from May 2000
when the Reserve Bank reduced its interventionist policies substantially.  The Reserve Bank no longer
quotes an exchange rate and intervenes in curren cy markets only to smooth out large seasonal swings
in demands for foreign currencies, such as those resulting from seasonal tobacco exports and large
fluctuations in aid flows.  The Bank's previous interventionist policy of maintaining a stable nominal
effective exchange rate became largely unsustainable following the kwacha's sharp depreciation in
1998.7  Although floated in February 1994, the currency was managed to maintain a stable nominal
exchange rate.  This led to volatile real apprec iations of the kwacha as Malawi's inflation rates
substantially exceeded those of its major trading partners.  Malawi's international competitiveness (as
measured by the real effective exchange rate) was weakened;  this placed additional pressures on its
external situation by discouraging exports and encouraging imports when it was substantially
liberalizing trade.  For example, in 2000, the real effective exchange rate of the kwacha depreciated
by almost 16%, following a 20% appreciation in 1999 (Table I.4).  There remains a substantial gap
between the real and nominal exchange rates of the kwacha;  the real rate remains at about 1995
levels.  The Government is committed to following appropriate economic policies to stabilize theexchange rate and contain the kwacha's real appreciation.  This was a major reason for reducing
export surrender requirements from 60% to 40% in May 2001.
Table I.4
Balance of payments, 1996-00
(US$ million and percentage change)
1996 1997 1998 1999 2000a
Current account -176 -263 -43 -151 -82
Merchandise trade balance
Exports (f.o.b.) 483 539 539 447 406
Imports (c.i.f.) 624 783 579 673 569
Services (net balance) -108 -84 -134 -90 -75
Private unrequited transfers (net balance) -24 -19 -25 9 9
Official unrequited transfers 97 83 157 157 148
Capital account 292 215 134 168 70
Foreign direct investment and other inflows 30 24 34 39 27
Overall balance 116 -48 91 17 -12
Table I.4 (cont'd)
                                                     
6 Advances are payable by the Government within four months of the end of the financial year.  If not
paid, the Bank cannot make further advances until the outstanding amounts are repaid.  The Bank may alsorequire the Government to issue Treasury bills or promissory notes on the open market.  All advances attract theruling bank interest rate.
7 A previous sharp nominal depreciation occurred in 1994.Malawi WT/TPR/S/96
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1996 1997 1998 1999 2000a
Memorandum items Percentage change
External reserves (changes) 106 -29 66 -5 0
Terms of trade 32.0 9.2 -4.1 -13.4 8.8
Nominal effective exchange rateb .. .. -49.5 -0.5 -32.0
Real effective exchange rateb .. .. -28.7 19.5 -15.6
.. Not available.
aP r e l i m i n a r y .
b Positive value denotes appreciation of the kwacha.
Source : IMF (2001), "Malawi: Selected Issues and Statistical Appendix", Country Report No. 01/32, January [Online].  
Available at:  http://www.imf.org/external/pubs/ft/scr/2001/cr0132.pdf.
14. Malawi accepted the obligations of Article VIII (Sections 2, 3 and 4) of the Agreement of the
IMF in December 1995.  However, all current account transactions must be approved and conducted
by authorized banks;  they are monitored by the Reserve Bank.  Restrictions on capital account
transactions have also been eased, and non-residents are freely allowed to repatriate investment
proceeds through commercial banks. Offshore borrowings are allowed, but the Reserve Bank
monitors their terms and conditions.  There is no forward exchange market.
(3) TRADE PERFORMANCE AND INVESTMENT
(i) Trade in goods and services
15. Malawi's commodity trade patterns are concentrated, especially for exports.  Merchandise
exports are mostly primary commodities, especially traditional exports of tobacco, which have
remained relatively stable, accounting for 62% of total merchandise exports (in value) in 1999
(Chart I.2).  Other minor traditional exports, tea, sugar, and coffee accounted for 16% of the total in
1999;  and non-traditional exports for 13%.  Exports of cotton fabrics and apparel have grown
significantly.
16. Merchandise imports are mainly manufactured products and intermediate inputs.  In 1999,
transport equipment represented 14% of total merchandise imports;  chemicals nearly 14%;  and non-
electrical machinery around 12%.  Imports of petroleum fuels and electrical machinery were also
significant, accounting for 12% and 9%, respectively (Chart I.2).
17. Malawi's share of merchandise trade with de veloping countries has decreased since 1995,
especially for imports (Chart I.3).  Since then, the share of developed countries in exports from
Malawi has increased from about 65% to 69% in 1999.  South Africa has been displaced as Malawi's
single largest export market by Germany and the United States;  their shares rose over this period
from around 15% to 17%  and from about 11% to 14%, respectively.  South Africa's share fell
substantially from some 16% to 12%.  Japan's share of exports also declined from 11% in 1995 to 7%in 1999.
18. Malawi's imports are increasingly being sourced from industrialized countries.  In 1999, their
share was around 42% compared with 29% in 1995.  This largely reflected a substantial decline inSouth Africa's share, Malawi's main import market, from about 44% in 1995 to 32% in 1999, and an
increase in the U.K. share from 4% to 16%.  Zimbabwe slipped from being Malawi's second largest
source of imports in 1995 (13% share) to third in 1999 (10%).  The shares of Germany and Japanincreased, while the U.S. share declined.
19. Malawi is a net importer of services, mainly of transportation and insurance.  In 1999,
Malawi's services balance was US$90 million in deficit, down from US$134 million in 1998.WT/TPR/S/96 Trade Policy Review
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(ii) Investment
20. High production costs, resulting from poor infrastructure and high prices of utilities, high real
interest rates and competition from neighbouring countries (e.g. Zambia, Mozambique and Tanzania),
have negatively affected investment, including foreign direct investment (FDI), in Malawi.  Despite
Malawi's efforts to attract FDI, inflows remain re latively small.  The stock of inward FDI increased
from US$250 million in 1995 to US$496 million in 2000.8  Although inward FDI recorded an upward
trend during the 1990s, it was erratic, falling from US$44 million to US$22 million in 1997, and
rising to US$70 million in 1998.  Since then, it has declined, to US$60 million in 1999 and
US$51 million in 2000, albeit still well above the annual average inflow of US$12 million between
1989 and 1994.  Since 1986, FDI inflows into Malawi ha ve grown at an annual average rate of over
30%, much faster than many other least developed countries.  However, most of this occurred duringthe late 1980s and early 1990s.
21. Data recorded by the Malawi Investment Promotion Agency (MIPA) cover only a small and
variable share (possibly less than half) of total inward FDI.  This is because not all FDI applicationsare processed by the Agency.  Nevertheless, the data suggest that most FDI in 2000 was in
manufacturing, construction, and distribution, with substantial investment in communications during
1999.  Another limitation, however, is that MIPA figures cover mainly intended investments, whichmay differ from actual FDI inflows.
(4) OUTLOOK
22. The Government's key macroeconomic objectives for 2001-04 are to achieve real annual GDP
growth of 4% in 2002 and subsequently of at least 5%.  The fiscal deficit (including grants) is
expected to be replaced with a small surplus of 1% of GDP in 2002.  The primary objective of
monetary policy is price stability using monetary targets.  The annual inflation rate is expected to fall
to 10% in 2003 and to 5% in 2006.  International reserves are expected to rise to 5.7 months of import
cover by 2004.
23. The October 2001 draft Poverty Reduction Strategy Paper assumes that annual economic
growth rates of 3%, 5%, and 8% are attainable in the short to medium term, but that 5% over the next
three years would be most realistic.  It also states that achieving Malawi's Vision 2020 aim of
reaching middle-income status by 2020 would requir e sustained annual real GDP growth of at least
10%.
24. The publicly financed National Economic Council also believes that the economy’s current
prospects are "somewhat encouraging", with 4-5% real GDP growth possible until 2004.9  However,
while  Malawi has the potential to restore respectable medium-term growth, the Council sees this asbeing dependent on a strong agriculture sector complemented by prudent fiscal and other stabilization
policies.  The U.S. African Growth and Opportunity Act (AGOA) is also expected to provide a boost
to Malawian industries, especially of textiles and clothing, through its favourable impact on exports,
investment, and savings.
25. While Malawi has made substantial progress in many areas to reform its economy,
development continues to be heavily constrained by a number of key factors, such as inadequate
infrastructure, misallocation of human resources, fiscal mismanagement, lack of accountability, weak
institutions, and poor governance.  Comprehensive reforms in these areas, including continued trade
liberalization and parastatal reform, coupled with privatization and success in attracting foreign
investment, will be vital to Malawi's developmental prospects.
                                                     
8 UNCTAD (2001), p. 302.
9 National Economic Council (2000).