Economic activity is expected to remain buoyant in 2007, building
on another impressive outturn registered in 2006. Gross domestic
product (GDP) is estimated to grow by 5.7 percent in 2007 from
a growth of 7.9 percent in the previous year. This development is
expected to be premised on growth in the agricultural, mining,
manufacturing, construction, transport and communication, private
and government sectors. Though growing at a lower rate than in the
preceding year, the agricultural sector is expected to remain a single
major driving force for economic growth.
Inflation averaged 8.2 percent in the first half of 2007 compared to 16.3
percent during a similar period in 2006. The deceleration in the rate of
inflation was on account of low prices of both, food and non-food items.
Food inflation declined as a result of increased availability of cereals
following better yields while the decline in non food inflation was
attributed to relatively stable fuel prices, relatively stable exchange rate
and improved fiscal discipline.
The rate of growth of money supply accelerated by 18.9 percent to
K72.9 billion in the first half of 2007 compared to 11.7 percent during
the first six months of 2006. The increase was mainly explained by a
seasonal upswing in economic activity.
As a result of increased foreign exchange inflows and proceeds from
tobacco exports, net foreign assets rose by 46.8 percent to K31.0
billion. Similarly, net domestic assets increased by 4.2 percent to
K41.9 billion during the period under review compared to an
increase of 5.5 percent in
the similar period of 2006.
Central government budgetary operations resulted into a smaller deficit of
K1.7 billion than the deficit of K3.1 billion recorded in a similar period in the
year 2006. The deficit was financed from domestic and foreign resources.
The external debt stock at the end of the first half of 2007 amounted to
US$493.2 million compared to US$400.6 million at the end of the second
half of 2006. Total external debt service totalled
K1.3 billion during the first half of 2007 compared to
K8.6 billion during the similar period in 2006.
Monetary developments during the first half of the year 2007 were
expansionary as money supply recorded a growth rate of 18.9 percent
(K11.6 billion) to K72.9 billion from end December 2006 balances.
In a similar period of last year, money supply recorded a growth rate of
11.7 percent (K6.1 billion). The increase in money supply emanated from
both narrow money and quasi money.
Narrow money recorded an increase of 22.3 percent (K7.8 billion) to K42.8
billion against an increase of 10.1 percent (K3.0 billion) recorded in a similar
period of the preceding year. In terms of components of narrow money,
currency outside banks grew by 35.5 percent (K5.5 billion) to K20.9 billion
whereas demand deposits grew by 11.9 percent (K2.3 billion) to K21.8 billion.
The rise in these balances reflected an upturn in economic activity during the
period under review.
Quasi money rose by 14.4 percent (K3.8 billion) to K30.1 billion. In a similar
period of 2006, it grew by 14.0 percent (K3.1 billion). Time and savings
deposits largely contributed to the growth of quasi money as they registered
an upturn of 18.2 percent (K3.0 billion) to K19.4 billion due to agricultural
incomes accruing to farmers. Foreign currency deposits increased by 8.1 percent
(K802.4 million) to K10.7 billion largely on account of proceeds from tobacco
exports.
During the first half of 2007, net foreign assets (NFA) largely contributed to the
growth of money supply as they rose by 46.8 percent (K9.9 billion) to K31.0
billion compared to an upturn of 38.1 percent (K3.8 billion) registered in 2006.
The increase in NFA emanated from both monetary authorities and
commercial banks.
Net foreign assets of monetary authorities rose by K8.5 billion
(US$70.4 million) and stood at K24.1 billion (U$220.7 million). This outcome
was on account of donor inflows received during the period particularly those
for the Ministry of Health’s Sector Wide Approach program.
As seasonally expected, commercial banks’ net foreign assets recorded an
increase of K1.3 billion (US$9.8 million) to K6.9 billion (US$49.1 million) due to
foreign currency deposits from tobacco sales which peaked during the months
of May and June.
At K41.9 billion, net domestic assets (NDA) of the banking system recorded an
increase of 4.2 percent (K1.7 billion) during the first half of 2007 compared to 5.5
percent (K2.3 billion) during the same period of the previous year.
The increase solely emanated from commercial banks as monetary authorities’ NDA
declined during the period.
Net domestic assets of commercial banks increased by K5.2 billion to K40.6
billion compared to an increase of K8.3 billion in 2006. This outcome arose from
an upturn in net domestic credit extended by the banks to all sectors. Commercial
banks’ net claims on government rose by K4.7 billion and amounted to K16.3 billion.
This was due to increased participation of the banks on the Treasury bill market.
Gross credit to the private sector rose by K1.7 billion to K29.5 billion whereas net
credit to statutory corporations increased by K916.6 million. This was on
account of the commercial banks’ reduction of lending rates following the
central bank’s adjustment of the liquidity reserve requirement.
Monetary authorities’ net domestic assets dropped by K4.3 billion to K1.7 billion,
mainly on account of a decline of K9.8 billion in net credit to government to minus
K3.3 billion. Government cleared its indebtedness with the central bank and
increased its deposits following improved domestic revenue collections and an
increase in foreign inflows.
Total T-Bill sub scri ptions during the first six months of the year amounted
to K61.4 billion representing a decline of K7.7 billion from K69.1 billion
recorded in the same period in 2006. The drop in sub scri ption was in line
with the decline in the maturities from K61.7 billion in first
half of 2006 to K57.7 billion in the period under review.
Out of the total sub scri ptions, the Reserve Bank of Malawi allotted
K60.4 billion, representing an increase of 10.6 percent from the amount
recorded in the corresponding period in 2006. Total maturities amounted
to K57.7 billion which were K4.0 billion lower than the amount registered
in the corresponding period in 2006. However, taking into account the
amount allotted against maturities, the T-Bill primary desk experienced
an over issuance to the tune of K2.7 billion compared to an under issuance
of K5.9 billion registered in the comparable
period. The over issuance emanated from the opening up of foreign
investors on T-Bill market and the conversion of K4.3 billion from
Ways and Means advances into the Reserve Bank
of Malawi T-Bill holdings.
During the first six months of 2007, the outstanding stock of T-Bills
amounted to K68.0 billion, representing an increase of K6.0 billion on
the K62.0 billion registered in the same period last year.
The increase in Treasury bill stock resulted from an increase in the
uptake of T-bills from K55.8 billion in the first half of 2006 to K60.4
billion in the same period in 2007. The rise was due to the foreign
investors’ participation on T-Bill market and the excess liquidity.
On sectoral basis, holdings of T-Bills by the Reserve Bank in its
open market operations (OMO) portfolio dropped from K14.8 billion
in the first six months of 2006 to K8.2 billion as at end of the
similar period in 2007. The drop emanated from the maturity of K6.6
billion worth of OMO bills held by the Central Bank. Similarly,
holdings by discount houses dropped from K10.6 billion
in 2006 to K7.0 billion in 2007, due to the net redemption of K2.4
billion by the two discount houses. However, holdings by
commercial banks, foreign sector and the private sector
increased to K18.7 billion, K11.0 billion and K23.1 billion,
respectively in the period under review. The foreign sector
intensified its participation in the market due to the attractiveness
of the rate of returns related to these government securities.
2.2.2 T-Bill yields
The all-type T-Bill yield dropped to 16.59 percent in the review
period, compared to 21.14 percent registered in the same period
in 2006. This was a result of excess liquidity prevailing in the market
and an increase in foreign investors’ participation. In terms of individual
tenors, yields for the 91-day, 182-day and 273-day bills dropped by 4.6, 4.7
and 4.3 percentage points to reach 16.40 percent, 16.56 percent and 16.82
percent, respectively.
2.3.1 Local Registered Stocks
There was no new issue of LRS in the first half of the year, however, there
was a conversion
of K1.6 million in January and a redemption amounting to K2.2 million in June.
As a result, the outstanding stock of LRS stood at K3.673 billion from K3.675
billion record in the preceding period. The LRS secondary market recorded no
activity as investors held onto their securities
with higher returns than Treasury and RBM Bills.
2.3.2 Share Market
NBS Bank Ltd became the fourth commercial bank to be officially listed
on the Malawi Stock Exchange during the review period. Following
the listing, the number of counters on the Stock Exchange increased
from eleven to twelve.
During the first half of the year, a total of 129.8 million shares traded for
K2.0 billion compared to 108.1 million shares that exchanged hands for
K1.1 billion in the preceding half of the year. The Malawi All Share
Index closed off at a record high 3,908.86 points from 2,310.67 points
recorded at the opening of the review period following an increase in
the Domestic Share Index from 1,793.39 points to 3,071.30 points. The
Foreign Share Index was at 521.59 points
after closing off at 1,865.04 points in a similar period in 2006.
Market capitalisation closed off at K1,731.8 billion compared to K1,672.1
billion recorded in the preceding half. In the corresponding half last year,
the market capitalisation stood at K1,655.6 billion.
The budgetary operations of the central government resulted in narrowing
of the budget deficit to K1.7 billion from K3.1 billion in the first half of 2006.
This was due to a significant increase in government revenues following an
increase in tax revenues and donor disbursements.
Total revenues stood at K68.1 billion during the first six months of 2007,
representing an increase of K16.0 billion from K52.1 billion collected in a
corresponding period in 2006. Of this amount, K44.9 billion were domestically
generated while the balance was in form of grants.
Tax revenues increased by K9.1 billion to K41.4 billion. Significant
improvements in tax collections were observed in withholding tax, import
duties and value added tax. Withholding tax amounted to K4.3 billion, some
K2.4 billion higher than that recorded in the first half of 2006. Import duties
went up by K2.3 billion to K5.8 billion in the first half of 2007. Value added
tax rose from K10.4 billion in the first half of 2006 to K13.2 billion in the period
under review. Non-tax revenue remained relatively stable at K3.4 billion. Foreign
grants increased by K6.8 billion to K23.2 billion. An amount of K10.0 billion was
earmarked for various projects while K2.2 billion, K2.6 billion
and K7.0 billion were for balance of payments support, National Aids Commission
and Health Sector Wide Approach, respectively.
Total government expenditures amounted to K69.8
billion, representing an increase of 26.5 percent over the amount recorded
during a comparable period in 2006. The increase was more pronounced in
the development expenditure which amounted to K21.1 billion. This was an
indication of government’s commitment in implementing
poverty reduction programs through expenditures on long-term projects like
development of road infrastructure. Of the total development expenditure,
K5.0 billion was domestically financed while the rest was financed through
foreign resources.
On the other hand, recurrent expenditure amounted to K48.7 billion, an increase
of K1.8 billion. The outturn resulted from increases of K1.7 billion and K2.9
billion in wages and salaries; and unallocable expenditures to K12.4 billion
and K3.9 billion, respectively. While these two categories went up, interest
payments and other expenditures went down by 28.1 percent and 4.5 percent to
K12.4 billion and K6.5 billion, respectively.
Total expenditures amounted to K69.8 billion while total revenues amounted to
K68.1 billion during the first six months of 2007. This translated into a deficit after
grants of K1.7 billion. The deficit was financed through domestic and foreign
resources. Net foreign financing amounted to K1.4 billion.
On the domestic front, government borrowing from the non-banking system
amounted to K7.9 billion. Government however reduced its indebtedness to the
banking system by K5.2 billion. Net domestic financing consequently stood at
K2.7 billion, compared to K1.1 billion recorded in the first six months
of 2006.
During the first half of 2007, foreign exchange transactions through the
Reserve Bank of Malawi (RBM) resulted into a surplus of K3.2 billion
compared to a net deficit of K9.3 billion recorded in the corresponding
period of 2006.
Total supply of foreign exchange were at K21.1 billion (US$150.4 million)
compared to K13.9 billion (US$99.9 million) registered during the first half
of 2006. This outcome was due to an increase in capital transfers coupled
with the Reserve Bank purchasing more foreign exchange from the market.
Cumulatively up to June 2007, total capital transfers and purchases of foreign
exchange from the market, amounted to K11.0 billion (US$78.6 million) and K7.6
billion (US$54.0 million), respectively, compared to K8.1 billion (US$58.6 million)
and K474.8 million (US$3.4 million) as at June 2006.
Demand for foreign exchange, on the other hand, totalled K18.0 billion
(US$166.6 million), compared to K23.2 billion (US$127.9 million), during a
corresponding period last year. These outflows were mainly in form of
sales to authorised dealer banks (ADBs) amounting to K10.3 billion.
Payments towards government external obligations totalled K4.3 billion.
Preliminary estimates of the merchandise trade account show that export value
increased during the first half of the year compared to a similar period last year.
This was attributed to an increase in the volume of exportable commodities,
particularly maize. On the other hand, preliminary estimates for imports indicated
a slight increase mainly on account of the depreciation of
the exchange rate.
4.3 The Malawi Kwacha Exchange Rate
The first half of the year is seasonally characterised by stability of the
kwacha, mainly as a result of foreign exchange availability on the
market from tobacco sales. This year, proceeds from tobacco and
export of maize, coupled with donor capital inflows
boosted the foreign exchange position. This therefore, led to a somewhat stable
kwacha trading at K140.6576 per dollar as at end June 2007 from K139.4660 as at
end-January, 2007. The kwacha similarly lost ground vis-à-vis the British pound
and the Euro by 2.2 percent and 4.0 percent, respectively, to settle at K281.4710
per pound and K189.3492 per euro as at end-June. However, against the Japanese
yen, the kwacha appreciated by 0.3 percent to trade at K1.1431 per yen.
Within the region, the local currency weakened with regard to the South African
rand and Zimbabwe dollar. The kwacha therefore depreciated by 4.0 percent and
0.8 percent, respectively, to close the review period at K19.8762 per rand and
K0.5626 per Zimbabwe dollar. Similarly, the local currency
significantly lost value against the Zambian kwacha by 14.4
percent to close the first half of 2007
at K0.0373 per Zambian kwacha.
The stock of medium to long term public external debt at the end of the first
half of 2007 stood at US$493.2 million, having registered an upward
adjustment of US$92.6 million from US$400.6 registered in the second
half of 2006. The increase was mainly on account of data verification
exercise in February conducted by officials from Ministry of Finance,
Reserve Bank of Malawi and MEFMI. In addition the increase was
also due to disbursements of funds from multilateral
creditors comprised of International Monetary fund (IMF), International
Development Association (IDA), African Development fund (ADF) and
International fund for Agriculture Development (IFAD)
in the first quarter of 2007.
In terms of creditors’ distribution, multilateral debt continued to dominate
its contribution to debt accounting for US$449.4 million, or 91.1 percent
of the total debt stock. Bilateral debt amounted to US$43.0 million,
representing 8.7 percent, while commercial debt totalled US$0.8 million,
representing 0.2 percent of the total outstanding debt.
Total medium to long-term public external debt service including HIPC
flows through the Reserve Bank of Malawi amounted to K1.3 billion
during the first half of 2007, reflecting a decrease of K12.9
billion in debt service from K14.2 billion reported in the second half
of 2006. This huge drop was a result of the implementation of HIPC
relief, MDRI and cancellation of debt by Paris club creditors
in 2006. Of the total debt service, K1.2 billion was on account of
externalized funds by public sector whilst K86.4 million was recorded
as HIPC proceeds. The central government remitted K1.1 billion to
its creditors during the period under review, while parastatal institutions,
notably ESCOM, paid K88.7 million to Development Bank of southern
Africa and FMO of Netherlands. On creditor category basis,
the largest amount went towards servicing multilateral debt
accounting for K807.7 million of the total payment to creditors
and bilateral debt accounted for K298.9 million of the total
debt service. The dominance of multilateral debt is a reflection
of Malawi’s strategy of giving preference to
concessional loans.
When compared to a corresponding period in 2006, which reported
K5.2 billion in actual externalized funds, payments to creditors
during the period under review dropped by K4.0 billion,
reflecting a decrease of 76.9 percent. The drop in debt service
was a clear result of the debt cancellation during the last half of 2006
when the country reached the HIPC Completion Point.
It is projected that actual externalized funds and debt relief for the
second half of 2007 will amount to K1.6 billion and K471.0 million
respectively, bringing the total debt service at the end of the year
to K3.4 billion in contrast to K22.8 billion recorded in 2006. Malawi
has benefited significantly from
debt cancellation since the attainment of the Completion Point.
Real Gross Domestic Product (GDP) is projected to grow by 5.7
percent in 2007, a slowdown on last year’s growth rate of 7.9
percent. Growth in the agriculture, utilities, ownership of dwellings,
distribution and the financial sectors are projected to slowdown,
whilst mining, manufacturing, construction,
transport and communication, private and social, and the Government
sectors are projected to
record increases in their growth rates.
Activity in agriculture sector is expected to increase by 7.3 percent in
2007 compared to 12.3 percent recorded in 2006. While small-scale
agriculture is expected to grow by 14.0 percent from 14.4 percent
in the preceding year while the large-scale agriculture is expected
to contract by 15.4 percent. This is mainly attributed to contraction
of tobacco production as a reaction to low auction prices fetched
during previous seasons.
6.1.1 Tobacco
Tobacco auction floors officially opened on 4th April 2007. According
to the market report by the Tobacco Control Commission (TCC), 107.7
million kilograms of tobacco are expected to be produced
in 2007 compared to the actual production of K153.5 million kilogram.
Actual production for 2006 was
recorded at 153.5 million kilograms.
During the first half of 2007, a total of 80.0 million kilograms had been
sold compared to 61.0 million kilograms sold in a similar period of 2006.
With better prices offered this season, there have been
no major sales’ disruptions. The average price for all tobacco was
US$1.67/kg as at end-June 2007
compared to US$0.96/kg fetched in a corresponding period of 2006.
The high prices fetched contributed to a substantial increase in proceeds
to US$134.0 million compared to US$58.2 million realised in a comparable
period of 2006. The 2007 tobacco earnings
estimate was revised to US$173.4 million, according to TCC’s market report,
compared to US$168.9 million earned in 2006.
6.1.2 Tea
During the first six months of 2007, tea production amounted to
32.7 million kilograms compared to 31.1 million kilograms produced
in a comparable period of 2006. Of the total, 13.1 million kilograms
were auctioned at Limbe Market compared to 12.6 million sold in a
similar period of 2006. Prices averaged US$1.02/kg in the first half
of 2007 compared to US$1.18/kg fetched in a corresponding
period of the previous year. Earnings amounted to US$13.5 million
and US$14.9 million during
the first half of 2007 and 2006, respectively.
According to the 2006/07 final agriculture survey, the estimated
production for all crops
was 10.7 million metric tonnes. Of these, minor crops were
estimated at 3.0 million metric tonnes while major crops accounted
for 6.7 million metric tonnes. The rest of the major
crops except for tobacco recorded annual production increases.
Regarding minor crops, wheat, millet, cashew nuts, sorghum and
sunflower registered annual production increases.
6.1.4 Food Security Situation
The household food security remained favourable during the first
half of the year following bumper crop harvest. The Ministry of
Agriculture and Food Security’s assessment report indicated that
less than 1.0 percent of total farm families in the country did not have food
from their own production as at end-June 2007. This compares with 8.0
percent recorded in a similar period of the previous year.
Following the two consecutive years of maize surplus, Malawi is, for
the first time, exporting maize. As of 30th June 2007, about 82,250 metric
tonnes of maize were exported. Apart from the
exports to Zimbabwe, Government is expected to export some
40,000 metric tonnes of maize and
10,000 metric tonnes of legumes to Swaziland during the year.
The mining sector which contracted by 22.2 percent in 2006 is expected
to recover in 2007 and register a growth rate of 2.7 percent. In addition
to on-going road construction works, recovery
of the mining sector, which provides intermediary inputs into construction,
is expected to impact
positively on value added in the construction sector. As such,
growth in construction sector is estimated at 14.9 percent in 2007
from 12.7 percent in the previous year. This in turn is expected
to contribute to the 9.1 percent growth in the manufacturing sector
in 2007 after registering 5.8 percent in 2006. Growth in the distribution
sector is expected to slowdown to 2.3 percent
in 2007 from 7.6 percent in 2006.
Activity in the transport sector is expected to grow by 11.9 percent in
2007 from 6.4 percent in 2006. The increase will be premised on improved
telecommunication and road networks.
6.4 Domestic Consumption and Savings
Following low and stable inflation rate in the country, expenditure on
consumption is expected to slow down to 118.6 percent of GDP from
121.3 percent in the preceding year. The ratio of domestic savings to
GDP, though still negative, is expected to improve by 2.7 percentage
points to negative 18.6 percent in 2007.
Inflation averaged 8.6 percent during the first half of 2007 compared to
an average of 16.3 percent for a similar period in 2006. All categories in
the consumer price index registered substantial inflation declines,
ranging from 0.2 percentage points (miscellaneous) to 15.9 percentage
points (household), compared to the previous year. Food inflation
decelerated from 18.5 percent in 2006 to 7.3 percent in 2007 as a result
of increased cereal availability following a better crop harvest.
Resultantly, food inflation plunged to as
low as 6.8 percent in June 2007 compared to 17.5 percent in June 2006.
Non-food inflation also decelerated to an average of 8.8 percent during
the first half of 2007 from 13.6 percent in a comparable period of 2006.
This development can be attributed to relatively stable
fuel prices, better than expected tobacco prices, improved fiscal
discipline as well as lagged effects
of tight monetary policy. International oil prices, on the other hand,
have been rising since March 2007
such that domestic pump prices have been cushioned by the Price
Stabilization Fund.
In the next six months, inflation movements will depend on the net
effect of food prices, movement of the exchange rate, external flows,
international oil price developments and prudence of both
monetary and fiscal policies.
