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The Impact of the Financial Crisis on Malawi

Khwima Nthara's picture

The impact of the financial crisis on Malawi has so far been limited. The financial sector is small and less sophisticated, with two (out of nine) commercial banks dominating the banking sector. Foreign direct and portfolio investment levels are very low. However, most commercial banks have reported difficulties accessing foreign credit lines. Furthermore, exchange rate movements in the west are having a negative impact on foreign aid inflows to Malawi. For example, DFID’s inflows (in Malawi Kwacha equivalent) have been reduced by about 25 percent due to a depreciation of the British Pound against the US Dollar.

In the medium to long term, the second round effects of the financial crisis could have a significant negative impact on Malawi through its impact on commodity exports and remittances. Malawi’s productive sector could be severely affected through reduced demand for the country's exports, mainly tobacco, sugar, and tea. These exports are particularly vulnerable because the EU and the US are the principal destinations. Further, Malawi receives significant amounts of remittances from abroad (around 4 percent of GDP). Therefore, a slowdown in the world’s economy is likely to have a significant negative impact on Malawi’s current account.

Comments

Submitted by Cho on
Might be better to differentiate between a reduction in remittances (which is unlikely to happen) and the slow down in the growth of remittances (which is what the World Bank Remittance team is predicting).

With the extreme nature of the world's economic meltdown Africa is even more open for business than ever before. With the unacceptable painful financial cancer spreading the international financial network, Africa is unlikely to be affected at the same rate as the advanced global economies. This is mostly that the financial infrastructure systems in Africa is not complex and sophisticated as that of other advanced economies......thank God for that!

The advanced and sophistication found in these economies has less regulation which encourages unchecked greed that affects these economies. For example, how can one individual defraud USA and world economy by $50 billion within the relaxed regulatory framework to guide against such action. We need to establish a strong regualtory frame in African countries throug the assistance of the World Bank, to ensure that individuals such as those found in USA or other advanced economies are not allowed to bring down the economy of any African countries. We need to learn from these mistakes.

Trade and investment opportunities in Africa under this current economic meltdown is one of the issues that can be discussed in the International Conference on Industry Growth, Investment and Competitiveness in Africa(IGICA) to be held in Abuja, Nigeria, on 8-10th June 2009. Visit the website on www.kfint.com/igica to register your interest to participate.

Just like any other individual in the global economy, I crave to understand the meaning of the financial turmoil hitting the developed countries, for the developing world including Malawi. In this post I will say something briefly about it. To do this, I will make some assumptions about the predominantly Western economic downturn in the short, medium and long term. As a point of departure, let's assume that the downturn will continue to trouble Western countries for sometime considering that part of its life span is hidden in whether consumers will soon regain confidence in the financial markets or not, then one would argue that for countries like Malawi, the short-run is less troubling because Malawi does not have a vibrant financial market and the Malawian economy is only indirectly and perhaps remotely related to it. Malawi's economy is also not driven by the housing market, whose collapse has led to the collapse of banking sector, many financial institutions before cascading into the real economies of the developed countries, so on impact (short-run) there is not much that Malawi may lose. In the medium term, the impact on Malawi's economy depends on what Malawi does to withstand the impact. In case Malawi remains less innovative in its taxation and government expenditure is not revised, the crisis could hit us through international aid. While some officials from multilateral institutions could be quick to argue that they would do everything to protect the poor (e.g. WB, IMF) implying that they would continue to finance developing countries' budgets, their financial clout depends directly on the clout of their donors most of whom are on sickbeds following the crisis. The United States for example has lost 10s of hundreds of thousands of jobs as a result of the crisis. Financial bailout of major banks is underway albeit with problems some of which need further billions of dollars to be sorted. Given that the USA and the developed world are the major financiers of the W. Bank and many other institutions with activities in developing countries, even the most optimistic analyst with some insights should be able to embrace the postulate that, unless the Western economies resurrect quickly, willingness to finance the World Bank and other development institutions, and hence the developing country programmes will wither. Depending on the extent to which this happens, the effects on developing countries could be big, small or ignorable. The case becomes nontrivial if you consider that the UK, whose economy and currency has been the marvel of Europe and the world has recently cut its own jobs, tried to bail out its own banks and has cut interest rates from 5 % to an astounding 2 % to stimulate the economy, something that has never happened since decades ago. Again, think about this, if Iceland was a largest financier of Malawi's programmes, it would be anyone's guess what shape our economy would have assumed already given what happened to their economy recently. So, money from multilateral institutions and/or bilateral donors may become sticky. We might also feel the hit through financial saving changes (e.g. parsimonious recruitment procedures, remuneration structures etc) in the NGOs and many donor funded programs. The other means through which Malawi could feel the heat is through international trade given that some of Malawi's trading partners are Western. Assuming that the meltdown continues, then those who consume our exports will revise their choice baskets given that they have less purchasing power than before. They might also want to try import-substitution strategies for their economies. Depending on whether their actions could affect pricing of our commodities, Malawi may in future start experiencing low terms of trade (assuming it can still produce for export). Moreover the financial crisis seems to have invited nationalist ideas and protectionism. Depending on how much other nations think they should protect their markets, we could see an increase in import tariffs or unfavourable import quotas in those other nations. Whatever happens, it could be argued that developing nations may become worse off in that regard. The same medium term could also see remittances to developing countries from overseas being reduced as the economies that employ our friends plummet. Again, it should be easy to argue that as financial markets get hit overseas, foreign direct investments in countries like Malawi could decrease in diversity and value. One can read that from Obama's speeches when he consistently argues that …. 'We need to protect our industries and jobs, we need to bring back all those jobs from China and other countries and have those machines manufactured on USA soil employing USA labour force!' Even though John Maynard Keynes would argue that in the long-run we are all dead, I will divert from his postulate and argue that for those that will embrace the long run, the impact of this crisis is likely going to shrink and finally vanish not only because nothing lives forever, but because in a world of technological change, it should be possible to see solutions to the crisis being hatched gradually. So even if Malawi became a rich nation with a vibrant housing market in the longer run, Malawi may not necessarily have to worry about this same problem because there will be a starting point! The discussion so assumes that developing countries will suffer some consequences of the financial meltdown, however, let me leave pundits with some food for thought in form of counteractive questions: Is it possible from a political economy perspective, that the financial meltdown in the West coupled with the fact that developing countries may not be badly affected (on impact), may in fact be the turning point in history such that the future might as well see today's wealth ranking inverted (though not perfectly so)? By that I mean could the crisis present an opportunity for developing countries to reorganise and develop their economies, so long the leaders of those economies have brains and the will to play it to their advantage? As natural resource producers, and relatively less poor than before the crisis, they would help set the economic development torn. All what is needed are the brains, acumen, will and regional integration. What do you think about this seemingly counterintuitive idea? Do you think it is an opportunity or a misfortune? Some of the things that Malawi could do to lessen any future impacts are: the Malawi Revenue authority would need to scramble to broaden its tax base among other things to prepare for any future shortfalls in donor assistance. There is also need to control government expenditure and reduce any monetary expansion growth strategies because any inflationary repercussion that could result from such strategies could be hard to handle in the absence of substantial foreign assistance. The country needs to strengthen its trade with local trading partners who have not been hit by the crisis and where transportation costs are low. However, it must be known that trade with surviving economies of the West is still important as most of our neighbours may not even need a good number of our products e.g., Uranium, Coal etc. There is also a need to diversify the economy and attempt to export different kinds of items to ensure some amount of foreign exchange even when some exports completely lose international demand. The technocrats should also critically study the decisive actions that are being taken by Western nations to salvage their banks in case Malawi may have to do the same one day. Obviously this is a diverse field and this post has just covered some broad outlines of the salient issues. Pundits in Malawi and elsewhere are welcome to comment anyhow even through the emails below. It would be helpful. CONTACTS greenwellmatchaya@yahoo.co.uk matchaya@wisc.edu bus4gm@leeds.ac.uk

Submitted by Bernabe Sanchez on
Khwima, Hope you are well. Positives: (1) The tobacco harvest was sold all in advance of the financial crisis and commodity price collapse, generating a record $465 million for 2008. (2) Oil and, very important for Malawi, fertilizer prices have fallen by over two thirds since their peak in mid-2008 (shipping costs have also fallen by 80%). If prices remain at this level Malawi is likely to save over $300 million in its import bill during 2009. (3) Exports: sugar prices have been unaffected by the collapse of commodity prices; more difficult to find info on tobacco and tea, but just as cocoa demand for these could be fairly income inelastic in world markets - cocoa prices are up 70% on the year; a slight negative is that cotton is down 40% from its peak in 2008; uranium prices holding at $53 per lb, so new exports revenue in 2009 of $175m (down significantly from mid-2008 estimates, but still a very significant boost to the economy). So in my view as far as Malawi's prospects for 2009 are concerned there are two issues of far greater importance than the global recession: (1) That a free and fair election takes place. (2) That the kwacha is allowed to depreciate to its real value against the USD - the current level of overvaluation (30%) is unsustainable and damaging to the country.

Submitted by luter on
There is a need to focus on the reduction of foreign remittances, World Bank remittances and on the improving of the domestic financial sector. If for the credits banks will attract less external foreign loans the impact of the global crisis on the financial sector will be minimal due to less currency exchanges and less demand of Pounds and USD.

Submitted by Victor Chavula on
Hi Khwima, Long time since we last talked, I would like to know if you have followed up on this article and what effects have so far been experienced with the Current account, and how Malawi is responding to them. Can you please get in touch? Victor Chavula Perth- Western Australia

Submitted by philip vale on
the economy of malawi can never develop as long as there is no investment in the energy sector . how can you attract large investments if you do not have enough electricity to serve the current industry.

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