Malawi

Renewed growth subject to climate risk

Growth should increase in 2025 but will be volatile. As in 2024, the country will face a shortage of foreign currency. Moreover, while the impact on agriculture of the drought caused by El Niño in 2024 is expected to fade, flooding could follow in the wake of La Niña. Malawi's economy is heavily dependent on rain-fed agricultural production, which employs nearly 80% of its population, and accounts for a quarter of its GDP and 60% of its export earnings. Agriculture, and thus the entire economy, is vulnerable to extreme weather events, which are likely to further intensify. In addition, low productivity and a lack of agricultural diversification exacerbate the difficulties. The government intends to embark on an agricultural transformation, based on the development of irrigation, as indicated in the first pillar of the Malawi 2063 agenda. To this end, in May 2024, the African Development Fund approved a budget support package of over USD 22 million to optimise the efficiency of agricultural sector spending and strengthen its climate resilience. Slightly better agricultural performance in 2025 will have a positive impact on other sectors of the economy. However, the shortage of foreign currency will continue to restrict imports of raw materials (including fertilisers) and fuel.

In contrast, electricity supply should increase, aided by the commissioning of 20 MW battery energy storage units in the capital Lilongwe, which will facilitate the integration of solar and wind generation, and by the interconnection with Mozambique, providing access to the Southern African Power Pool (SAPP). This will benefit manufacturing (10% of GDP in 2023) and services (48%). A significant proportion of the population will still suffer from food insecurity and poverty, limiting the contribution of their consumption. Thanks to better weather conditions and their impact on food prices, monetary policy support and base effects, inflation will decline. However, the monetisation of the budget deficit will maintain inflationary pressures.

Deep-rooted deficits and debt overhang

To offset recent climatic shocks, the inflationary consequences of the war in Ukraine and the pandemic, Malawi adopted an expansionary fiscal policy that has been accompanied by large deficits and has led to over-indebtedness. The need for social protection and poverty reduction measures, particularly in the run-up to the September 2025 general elections, is hampering the government's ability to raise the funds needed for investment in economic development. Recurring expenditure absorbed almost all revenues in the 2024-2025 budget. However, for fiscal year 2025-2026, the government will continue to identify agriculture, tourism and mining as sectors with high growth potential, and they will receive significant allocations. In particular, the agricultural sector will benefit from a significant share of the budget (8.3% in 24-25), with investment projects focused on irrigation and machinery. The government will also focus on transport and ICT. Progress on several road and rail projects, in particular the Nacala Road Corridor Development Project, will significantly reduce transport costs. Debt servicing (5% of GDP in FY2023-24), the majority of which is domestic (47% of total debt), will also weigh on expenditures. In terms of revenue, the government intends to rely more on domestic sources, notably taxes. Malawi will also be able to benefit from international aid, albeit limited. In May 2023, the World Bank resumed budget support that had been put on hold since 2017, with a grant of USD 80 million. Furthermore, in October 2024, the EU announced that it would resume direct budget support to Malawi, with a plan to disburse EUR 55 million over three years to strengthen secondary education. However, the disbursement of these funds will depend on progress in implementing the reforms agreed with the IMF. A programme accompanied by an Extended Credit Facility (ECF) was adopted in 2023, but the second review was not carried out due to lack of progress. It is likely to take until after the elections to get back on track. In the short term, the budget deficit will be financed by domestic borrowing and money printing. This will add to domestic debt, which is rising sharply, even though no restructuring is planned.

The expected increase in tobacco production, which accounts for more than half of export earnings, as well as other crops, combined with the expected resumption of uranium mining at the Kayelekera mine, will support export growth. The latter will also be supported by an agreement with China on peanut and soybean exports. On the other hand, fertilisers and petroleum products, which account for a third of imports, could see their prices fall. Imports will also keep declining owing to the shortage of foreign currency. Despite these improvements, the country will retain its structurally negative trade balance, which is fueling the foreign currency shortage. In October 2024, foreign exchange reserves only covered 2.1 months of imports. However, debt restructuring and a new ECF could ease external accounts.

The country is in default with its external bilateral creditors, mainly India and China, and commercial creditors, in particular the Trade & Development Bank and the African Export-Import Bank. According to the IMF, the country requires USD 986 million in debt relief before 2027, amounting to roughly 7% of its current GDP. Malawi has obtained restructuring commitments from its bilateral creditors. Ongoing negotiations with commercial creditors should soon result in significant maturity extensions. Nevertheless, over 60% of Malawi's external debt is multilateral and thus excluded from restructuring.

Elections will test institutional strength

In July 2024, the Tonse Alliance, led by President Chakwera since his election in 2020, lost its parliamentary majority after the United Transformation Movement (UTM) party quit the alliance. This has increased the risk of demonstrations ahead of the September 2025 elections. Mr. Chakwera is unpopular, with accusations of bad governance and an unyielding economic crisis. In addition, the presidential party has been suffering from internal dissension since the death in a plane crash of Saulos Chilima, former party leader and Prime Minister. But the opposition Democratic Progressive Party (DPP), which holds 62 seats in Parliament and governed the country from 2014 to 2020, is also unpopular due to its poor economic record and corruption under former president Peter Mutharika. The implementation of reforms recommended by the IMF could also be a source of contestation.

Malawi will continue to enjoy positive ties with China in the form of a strategic partnership. The country recently joined the New Belt and Road initiative, and, in September 2024, China abolished the tariffs placed on Malawi. The country also benefits from the African Growth and Opportunity Act (AGOA), a US trade preference programme. On a regional level, the country is developing regional projects with its neighbours, Mozambique and Zambia. For example, Mozambique will lease part of its Nacala port to Malawi, which will facilitate regional connectivity and the country’s access to the sea.

Last updated: January 2025