Mary C Nkosi: Reflections on Malawi's economy
Speech by Mrs Mary C Nkosi, Deputy Governor of the Reserve Bank of Malawi, at the business
breakfast organized by Sunbird Malawi, Blantyre, 29 June 2012.
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The CEO of Sunbird Malawi, Mr Roger Gardner
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The Director of Finance for Sunbird Malawi, Mr Patrick Lisilira
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The Chairman of the Malawi Confederation of Chamber of Commerce and Industry
(MCCCI), Mr Chikankheni
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Chief Executive Officers of various organisations represented here
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Distinguished Guests;
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Ladies and Gentlemen
I am delighted to be here this morning at this important Business Breakfast organized by Sunbird
Malawi. Let me start by applauding the management of Sunbird Malawi for their foresight in
fostering discussions and debate on issues that affect our economy through such an interaction. It
is through such fora that the intellectuals and business community in this country make enormous
contribution to the policy making process. I am aware of your active participation in Ministry of
Finance pre-budget sessions and other brainstorming and consultative sessions on the economy.
We do not take that for granted. It shows your commitment to seeing positive change in our
economy.
At the mention of a business breakfast, my expectation was that it was going to be a time to enjoy
breakfast while listening to business people discussing. But when I learnt of what was expected of
me, I was able to understand the importance if this occasion to the business community and the
valuable opportunity it provides in enabling us to interact and share ideas on issues that affect our
day to day life, especially things that affect the economy and lives of many Malawians.
I deem the theme "Think Global, Act Local" as a very important one especially at this juncture
when tremendous will and effort is being applied to fight the numerous challenges facing us. There
is renewed optimism amongst Malawians, especially the business community; reflecting the desire
of every Malawian to see that the economy is doing well and that most people have sufficient
income for essentials and perhaps a little extra. We would want to see that businesses are hiring
and jobs are relatively easy to get. We may, not have a job for everyone but we would like to see
that everyone is well off.
Distinguished guests, ladies and gentlemen,
The economic problems we have been facing in recent years reflect, to a large extent the sources
of our growth. The Malawi economy, prior to 2011, performed well, supported by macroeconomic
stability. However, this growth led to a rapid rise in imports, which outpaced the growth of exports
and contributed to the widening of the external current account deficit, and to falling international
reserves.
Distinguished guests, ladies and gentlemen,
Malawi's economic growth slowed down significantly to 4.3 percent in 2011 after enjoying growth
rates above the needed 6 percent since 2005. Actually growth averaged 8 percent between 2007
and 2010 with agriculture taking the lead and other sectors benefiting from the growth in
agriculture. The recent underperformance is largely registered by sectors that heavily depend on
imports - manufacturing, transportation, construction and wholesale and retail trade sectors
- reflecting unavailability of foreign exchange in the domestic market. Growth is expected to
stagnate in 2012 and remain at 4.3 percent but will pick up in 2013 with a projected growth rate of
5.7 percent.
The rate of inflation has trended upwards since early January 2012 reaching 17.3 percent in May
2012 (12.4 percent in April), largely explained by rising import costs, as imports have been priced
at a much depreciated rate. Gross official reserves have declined from slightly over $218 million
(1.7 months of prospective imports) in June last year to just over $120 million (one month of import
cover) by end-April 2012. Money supply has been growing at unprecedented levels, an average of
over 30 percent since early 2011 owing to expanded net credit to government as government
revenue performance was negatively affected by the underperformance of businesses in recent
years.
Ladies and gentlemen
The results of all that we were going through started manifesting in November 2009 when we
started having queues for forex. After our suppliers cut our lines of credit, we did not adjust
accordingly although we are a price taker and with worsening terms of trade there seemed to be no
end to the woes.
Whereas Malawi escaped the first round effects of the Global Financial Crisis, we were caught up
in the second and third round effects in 2009/10. Our foreign markets started to adjust their
demand for our commodities and at the same time global financiers started to look cautiously at
their balance sheets resulting in locking up the financing facilities. As you might be aware, the tap
of foreign aid at that same time was closed due to political and economic governance issues.
Revitalising the economy remains our biggest challenge but it can be done. The good thing is that
we know where things went wrong and if that were corrected, it is not too late to get back on a
positive trajectory. Recent policy changes, including the 49 percent devaluation of the official
Malawi kwacha exchange rate against the US dollar, and the subsequent floatation of the kwacha
exchange rate are some of the policies that are being put in place to create a better Malawi. There
will be short term costs, but the long-term gains more than compensate for the losses.
Ladies and gentlemen
We made it clear at the onset that the adjustment we have taken will have a price that we all,
Malawians have to pay in order to have a long lasting solution. Waiting any longer would have
been worse. At the Bank we do not envisage a reversal on the position that we have taken.
The results in the short term have been exceptional. Forex is now available; the queues at the
bank for forex and fuel have dissipated. Tobacco prices are good and we anticipate a reversal in
the tobacco production this coming season. There is an immediate pass-through to price increases
and we anticipate the full effect of the devaluation in the next six months with inflation going up
from the March level of 12% to an average of 18.4% in 2012. However we anticipate an
amelioration of inflation to average 16.1% in 2013 and returning to a single digit average in 2014.
The most frequently asked question is: "How will the Reserve Bank ensure sustainability of foreign
exchange?" I am proud to report that the Bank has put tremendous efforts to address the supply
side of foreign exchange. You may be aware that the Bank has taken a lead in the Export
Development Fund (EDF) initiative to promote exports in the country.
Consequently the Government has developed the National Export Strategy (NES) to be
implemented through participatory process to transform Malawi from a predominantly importing
and consuming nation to becoming a producing and exporting nation. The NES will prioritise
investment incentives to develop productive capacity, encourage foreign and domestic investment
and ultimately create sustainable export capacity.
Ladies and gentlemen
You will agree with me that Malawi has lagged behind its neighbours in the sub-Saharan Africa
with its share of regional exports to the world declining sharply over time in terms of the business
environment indicators such as transaction costs and infrastructure. Adjusting the exchange rate
regime was one of the measures to enhance Malawi's international competitiveness. The bank
recognises that further steps still remain to be undertaken, such as removal of structural
bottlenecks that are retarding growth and diversification of the economy, e.g. reliable and adequate
supply of energy.
The Bank believes that the private sector is an engine of growth in any economy. But for the
private sector to make any impact the Bank would encourage that they should improve on their
efficiency in both resource mobilisation and allocation.
Ladies and gentlemen
Why do we think that the steps we have taken are plausible and will work for Malawi? Malawi has
actually come late in responding to problems we were facing. There is a lot to learn from our
neighbours who went through similar situations and had responded. We are far behind some of the
countries such as Zambia, Uganda, Tanzania and to some extent Mozambique who liberalised
their financial sectors some time ago. It was also painful for each one of those countries but the
pain did not last.
Mr. Chairman, ladies and gentlemen
I thank you for your attention and God bless you.