AMR: Malawi

GDP growth – agricultural output set to decline

We now trim our Malawi GDP growth forecast to 2.8% y/y for 2022, from 4.0% y/y. For 2023, we now forecast 3.0% y/y. A likely lower agricultural outturn, combined with rising fertilizer prices, may constrain growth. Moreover, the government’s debt restructuring plans may reduce government spending. The IMF and government forecasts for GDP growth are now at 2.7% y/y and 4.1% y/y respectively for 2022.

Balance of payments – FX reserves sliding 

We expect Malawi’s current account deficit to remain wide, at over 17.3% of GDP in 2022  and 15.1% of GDP in 2023. We forecast a C/A deficit of 13.9% of GDP at end 2024. The  higher prices of essential imports, such as fertilizer and petroleum, will keep the import bill  elevated. And, adverse weather would reduce agrarian exports, adding to external  pressures. 

Underlying BOP pressure has seen FX reserves fall faster this year. FX reserves had reached USD374m (or1.5-m of import cover) at end Mar, declining steadily from USD429m (1.72-m of import cover) in Dec 21. External debt service is around USD139m for 2022, which is over a third of FX reserves.

Monetary policy – hawkish bias

The policy rate was hiked by 200 bps at the Apr MPC meeting; we foresee it remaining unchanged for this year. Indeed, the policy rate has been maintained at 12% since Nov 20 to support the economic recovery. However, the April hike follows headline inflation trending higher and moving well outside the RBM’s medium-term inflation target of 5.0% y/y, with a 200 bps corridor. With inflation largely being supply-side driven, the MPC may then hike again to contain inflation expectations.

FX outlook – enduring FX liquidity constraints

We see the USD/MWK pair reaching 867 at end 2022, and 929 at end 2023. Though the tobacco marketing season has started, FX liquidity remains under pressure. The RBM has now mandated that exporters sell 30% of their export proceeds directly to the central bank. Since the RBM intervenes infrequently in the market, FX liquidity may therefore face further pressure. 

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