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Country Commercial Guides for FY 2000: Malawi Report prepared by U.S. Embassy Lilongwe, released July 1999    Note*

CHAPTER II. Economic Trends and Outlook

Major Trends, Outlook and Principal Growth Sectors

8. Real gross domestic product (GDP) grew by 3.3% in 1998, compared to the 5.0% growth in 1997. While agriculture grew by 3.7% (driven primarily by growth in small-scale farm output), the manufacturing sector actually registered negative growth, as did the transport and financial/professional services sectors. Malawi's distribution sector grew by 5.2%. Growth in the utility sector registered 6.1%. Growth in large-scale agriculture declined by 11.9%, while small-scale agriculture grew by 8.9%. Exports (f.o.b.) grew by 67.6% over 1997, and imports (c.i.f.) increased by 55.3%, limited by the August 1998 Kwacha devaluation. The GOM has set a real GDP growth target of 5.5% for 1999. It anticipates that the agricultural production will increase by 7.6%, with production of maize (Malawi's staple crop) increasing by 38.4%.

9. Average annual and year-on-year inflation rose from 9.1% and 15.2% in 1997 to 29.7% and 53.0% in 1998. Interests rates also rose, with the Discount Rate climbing from 23% in 1997 to an average of 36.2% in 1998. As of July 1999, the discount rate stood at 47%. Commercial bank lending rates averaged 49%. The Government has set a 21% year-on-year inflation target for December 1999. The average-annual inflation target for 1999 is 43%.

Government Role in the Economy

10. The Government exercises a facilitative rather than a regulatory role in economic activities. The Government continues to move forward with its multi-sectoral privatization program. By March 1999, privatized assets amounted to over MK 840 million (approx. USD 19 million). In July 1999 Old Mutual PLC insurance company became the seventh and largest member of the Malawi Stock Exchange (MSE). Recent Government initiatives targeting improvements in the road infrastructure, together with introduction of private sector participation in the telecommunication sector, have begun to render Malawi's investment climate more attractive. The fiscal deficit for the financial year 1998/99 amounted to 8.1% of GDP excluding grants and 1.6% of GDP including grants. Budget estimates place the FY99/2000 fiscal deficit at 11.6% of GDP excluding grants and 2.2% of GDP including grants. Education, Health, and Agriculture are the three largest items in the GOM FY 99/2000 Recurrent Account Budget.

Balance of Payments Situation

11. The balance of merchandise trade (on a f.o.b. basis) showed a surplus of MK 2.7 billion (approx. USD 87 million) in 1998, up from a surplus of MK 1.58 billion (approx. USD 95.5 million) in 1997 (see exchange rate differential in Appendix B). The total value of exports (f.o.b.) increased to MK 14.80 billion (approx. USD 476.3 million) in 1998 from MK 8.8 billion (approx. USD 531.4 million) in 1997. The total value of imports (c.i.f.) rose from MK 12,847.7 million (approx. USD 776 million) in 1997 to MK 20081.11 million (approx. USD 646 million) in 1998. The Current Account deficit worsened to MK 8.51 billion (approx. USD 273.9 million) in 1998 from MK 5.43 billion (approx. USD 174.8 million) in 1997. The Current Account balance/GDP ratio worsened from 13.1% in 1997 to 16.1% in 1998. The overall balance of payments surplus (after debt relief) worsened from MK 168.1 million (approx. USD 10.2 million) in 1997 to a deficit of MK 5.8 billion (approx. USD 187.9 million) in 1998. In 1999, total exports (f.o.b.) and imports (c.i.f.) are expected to be MK 20.3 billion (approx. USD 472 million) and MK 26.2 billion (approx. USD 609 million) respectively. Infrastructure Situation

12. Malawi's infrastructure has significantly deteriorated in recent years. As part of its economic structural reform efforts, the Malawi Government has agreed to the introduction of private sector participation in state-owned electricity, water, and telecommunications companies. The country's second GSM cellular telephone network began service in the city of Blantyre in July. Malawi has one Internet gateway provider and several e-mail service suppliers, but charges are prohibitive. In September 1998 United States Agency for International Development (USAID) Malawi and the GoM signed a memorandum of understanding (MOU) on implementation of the Leland Initiative -- a U.S. Government project extending low cost, full Internet connectivity to several African countries. This move will effectively break up the heretofore de facto monopoly on Internet provider services held by Malawinet Inc. In signing the MOU, the GOM agreed to allow public and private entities equal access to the U.S.-provided Internet gateway node. The GoM also agreed to implement cost-based billing, a move that should reduce consumer rates by one-half to one-third. In December 1998 the Malawi Post and Telecommunications Corporation (MPTC) agreed to a proposed plan of action for Leland implementation. The initiative can become operational after the Malawi Government effects the requisite regulatory and tariff-rate reforms.

13. As of July 1999, the Malawi Government has done little to address the Y2K problem. Malawi's banking sector is Y2K compliant; the telecommunications and electricity sectors are not. Malawi's FY 1999/2000 budget reportedly contains no/no line item for Y2K contingencies. President Muluzi has designated the Reserve Bank of Malawi (RBM) as the GoM lead agency for Y2K issues. RBM governor Matthews Chikaonda holds overall responsibility for Malawi's National Y2K Task Force. Mr. P. Mitochi, RBM General Manager for Operations, holds the title of National Y2K Coordinator, and as such bears responsibility for the day-to-day management of Malawi's Y2K effort.

14. U.S. Citizens contemplating traveling or residing in Malawi in late 1999 or early 2000 should be aware of potential difficulties. Interruptions in services including telecommunications, electricity, air transportation, water, health care, and related or dependent infrastructure may occur. The Department of State encourages U.S. citizens to monitor the State Department Internet home page at http://travel.state.gov for updates on Y2K issues.

15. Malawi's landlocked position results in transport costs that account for over 30% of the country's total import bill -- a serious impediment to trade. The rail links to the Mozambican port of Nacala and a road through Mozambique to the Zimbabwean capital Harare provide the cheapest and fastest routes to the outside world. Most transporters prefer the land route to the South African port of Durban, as they find it more reliable. However, planned privatization of the management of the Nacala railway line -- involving concession agreements by the Governments of Mozambique and Malawi -- will likely provide seamless rail service between Malawi and the Nacala port, thus improving transport facilities and drawing traffic away from the land route to Durban. British Airways offers a weekly flight between London and Lilongwe. There are limited numbers of daily international flights from Lilongwe and Blantyre's International Airports to other countries in the region, notably Nairobi, Harare, Johannesburg, Dar es Salaam, and Lusaka.