World Bank urges Malawi to invest in agricultural resilience to spur economic growth in 2017

Malawi needs to develop a better system to mitigate agricultural shocks while continuing fiscal discipline to set itself on an economic growth recovery path in 2017. This is the message of the third Malawi Economic Monitor (MEM), titled Absorbing Shocks, Building Resilience, released today by the World Bank.

The latest economic analysis for the country presents a review of recent economic developments and a macroeconomic outlook, and explores issues related to agricultural risk management. Growth for 2016 is projected to remain weak, with the late onset of rains and erratic dry spells having depressed expectations for agricultural production.

“Were it not for a second year of weather-related shocks, Malawi would likely be starting to see signs of a growth recovery, especially supported by the progress being made in fiscal control,” said Richard Record, World Bank senior country economist for Malawi and lead author of the report.

The report observes that in 2015 Malawi saw a Gross Domestic Product (GDP) growth rate of just 2.8 percent as a result of adverse weather conditions and macroeconomic instability. The double shock of drought and floods in 2015 reduced agricultural production, leading to food shortages which in turn pushed up the rate of inflation. A consecutive year of drought has led to another poor performance in the agricultural sector with continued large food shortages and GDP growth now expected to be just 2.6 percent in 2016.

According to the report, efforts to consolidate public expenditure began to show positive results in 2015, with tighter control over spending, the avoidance of expenditure overruns by ministries, departments and agencies, and reduced domestic borrowing. Pilot reforms to the farm input subsidy program show promise, and if scaled up have the potential to open up fiscal space for investments in resilience and social protection.

The report notes that agriculture is important in the country’s overall economy and household food security, with Government spending about $250 million annually on this sector. However, risks associated with drought, flooding, disease, price volatility, and low levels of on-farm adoption of risk management practices and technologies, have all contributed to volatile and often negative rates of agricultural GDP growth. As Malawi increasingly looks towards breaking the cycle of vulnerability, a key medium term priority is to invest more in agricultural resilience. In the short term, a recovery to growth is possible in 2017, based on continued efforts to maintain tight control over public expenditure and borrowing.

Key ways to promote agricultural resilience include connecting farmers to markets and strengthening farmer capacity to take up risk management practices. Measures to promote freer trade in agricultural products, and to reduce price distortions and volatility would also help to boost incentives to invest and produce. Improved transparency and clearer roles of the key institutions that intervene in maize markets – namely the Strategic Grain Reserve and the Agricultural Development and Marketing Corporation – will also be needed in order to promote fairer agricultural markets.

The Malawi Economic Monitor (MEM) series of bi-annual reports draws on international experience and best practice to provide up-to-date information and analysis on Malawi’s economy. The aim is to foster better informed policy analysis and debate regarding key challenges that Malawi needs to address in order to achieve high rates of stable, inclusive and sustainable economic growth through an in-depth analysis of economic trends and a macroeconomic outlook. The earlier editions of the MEM issued in 2015 were Managing Fiscal Pressures and Adjusting in Turbulent Times.

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Overview

Economic developments

Malawi’s agricultural sector is predominantly rain-fed and operates within the framework of a short growing season. Early estimates point to a 12.4% decline in maize production for the 2015/16 growing season due to flooding in the southern districts and a countrywide drought, against an already low 2014/15 base, according to the report.

An estimated 17% of the population were unable to meet their 2015/16 food requirements. Similarly, low levels of production are expected for other crops, except for tobacco. As such, gross domestic product (GDP) growth in 2016 is estimated at 2.6%. In 2015, Malawi recorded a (GDP) growth rate of just 2.8%, as a result of both adverse weather conditions and macroeconomic instability.

Inflation is expected to remain elevated in 2016, declining after the maize harvest season before rising again in the second half of the year. The average rate of inflation is projected to stand at 20.8% for 2016 as a whole. By the end of 2015, the average annual headline inflation rate stood at 21.9%.

The fiscal deficit for FY15/16 is projected to reach a value of 5.9% of GDP, compared to the figure of 5.4% recorded in FY14/15. This is premised on continued efforts to restrain expenditures in the face of weak revenue collections and expenditure pressures on areas of the budget that are exposed to foreign exchange movements.

The report notes that a recovery to growth is possible in 2017, although this will depend on continued fiscal restraint and an effective response to the challenges resulting from a second year of high levels of food insecurity. By addressing the underlying causes of both non-food and food inflation, interest rates may begin to fall to levels that would begin to restore business confidence. This would lead to increased private sector investment and job creation, both of which Malawi desperately needs. To achieve this, policy makers should consider implementing the following priority actions:

• Continued efforts to exercise tight control over public expenditure: This will involve careful control of expenditure commitments, prudent management of growth in the public sector wage bill, and strict enforcement of budget ceilings across all government ministries, departments, and agencies to avoid expenditure overruns.

• Continued implementation of a tight monetary stance and the maintenance of positive real interest rates: Interest rates will only begin to fall once the underlying causes of high non-food and food price inflation are addressed.

• Implementation of reforms to open up fiscal space and an increasing emphasis on resilience-building investments rather than recurrent spending: In particular, reforms to the farm input subsidy program (FISP) create opportunities to free up public resources for alternative, more productive uses.

Investing in agricultural resilience

Despite the relatively high level of public spending on agriculture of about $250 million annually, risk management continues to be a significant challenge for Malawi’s agricultural sector. As a result of risks related to drought, pests and diseases, and price volatility, Malawi has recorded negative rates of agricultural GDP growth during six years in the period from 1992 to 2014. With the central position of agriculture in the economy, as a source of food, incomes, employment for a large proportion of the population, and of revenue and foreign exchange for the government, any shock experienced by the agricultural sector has a substantial impact on the overall economy.

The large losses resulting from production risk in Malawi stem primarily from the low level of on-farm adoption of risk-management practices and technologies. Increasing producers’ capacity to mitigate risks at the farm-level is crucial to reduce losses, and to increase resilience in the sector, to ultimately positively impact productivity and competitiveness in general. However, such initiatives will only be successful if an incentivizing environment is in place. To enable the emergence of this environment, this MEM therefore recommends the following:

• Increase the uptake of on-farm risk management practices: Ensuring that farmers have access to markets that enable them to generate profits, and link them to new export partnerships, or on-/off-farm processing activities.

• Reduce price distortions and volatility: Measures to promote freer trade through the implementation of predictable and transparent policies will promote production and exports by enabling fair prices at all levels of the supply chain.

• Improve coordination between and redefine roles of the public agencies responsible for both maize marketing and risk coping interventions.

• Strengthen and align agriculture risk management policy with broader policies and long term vision for the sector’s development, supported by the implementation of a functional agricultural information management system.