Friends of Malawi: Learn About Malawi: About Malawian Geography

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A Brief Economic History

With the help of foreign aid and investment, Malawi's economy prospered in the 1970s, growing at an annual rate of 6 percent. However, thirty years of authoritarian rule and several events of the 1980s stalled any significant and broad-based economic development. First, the rising world oil prices in the 1980s significantly affected Malawi access to oil and the cost of shipping its exports. Secondly, inflation around the world drove down the value of Malawi’s main export, tobacco. Finally, the Mozambique war of 1986-89 further limited exports and created an influx of nearly a million refugees. Together these events made it more and more difficult for Malawi to repay its debt burden.

It wasn’t until the 1990s with a movement back towards democracy that private investment and foreign aid began to return to Malawi. The end of the Mozambican war reopened more export routes. In the late 1990s, trade restrictions were eased and customs duties were lower. The government encouraged diversification and began to privatize companies that Dr. Banda once held tightly such as Air Malawi, National Bank, and press. Improved rail service to the Mozambican deepwater port of Nacala subsequent to the December 1999 privatization of Malawi railways is expected to significantly lower the share of transport costs in Malawi's import bill once the rail system has been completely rehabilitated. Tourism is viewed as a potentially significant economic resource. Luxury hotels and resorts are being built on the shores of Lake Malawi and in national parks.

Agriculture forms the mainstay of Malawi's economy, accounting for nearly half of its GNP. Tobacco, tea, and sugar together generate over 70% of export earnings, with tobacco providing the lion's share (over 60%). The agricultural sector employs nearly half of those in formal employment, and directly or indirectly supports an estimated 85% of the population. Malawi has a narrow economic base with small industry and mining, and few known economically viable deposits of gemstones, precious metals, or oil.

Legislatively, Malawi has a relatively free investment environment, but poor infrastructure (roads, telecommunications, electricity, and water) and bureaucratic hurdles deter investors. A relatively high degree of Government ownership/control of the financial sector stifles competition. The Government, however, has moved forward with its multi-sectoral privatization program, and as of March 2002, the Privatization Commission had disposed of 40 of the 100 state-owned enterprises targeted for sale. Malawi Railways was privatized in December 1999 and the Government of Malawi has also sold its shares in National Bank and Commercial Bank.

Despite these improvements, Malawi remains among the poorest countries in the world, and its per capita income is less than US$180 per year. Corruption and mismanagement still threaten the success of development. There are still great discrepancies in the distribution of wealth and much of the population has not benefited from recent progress. In March 2000, the country embarked upon a program aimed at obtaining debt reduction.

Malawi's economy is based largely on agriculture, which accounts for more than 90 percent of its export earnings, contributes 45 percent of gross domestic product (GDP), and supports 90 percent of the population. Malawi has some of the most fertile land in the region. Almost 70 percent of agricultural produce comes from smallholder farmers. Land distribution is unequal with more than 40 percent of smallholder households cultivating less than 0.5 hectares. The country's export trade is dominated by tobacco, tea, cotton, coffee, and sugar.

From 1995 to 1997 the Government of Malawi followed good economic policies; but in recent years the pace of reforms has slowed, expenditure control has weakened, and agricultural prospects have become mixed. Tobacco revenues declined in 2000 because of slumping prices, declining yields, and declining quality. This together with volatile exchange rates, high annual inflation (30 percent in February 2001), and high real interest rates has resulted in slow growth of about 2 percent in 2000 and -1.5 percent in 2001.

Over the last two years, the government—with the support of the Bank and the IMF—has tried to implement a growth-oriented reform program; but results have been mixed. Fiscal slippages in 2002 and early 2003 caused high interest rates and limited progress on reducing inflation. In addition, a severe drought in the 2001/02 agricultural season further weakened Malawi's economy. Consequently, Malawi's economy still depends heavily on aid from international financial institutions, and individual donors. In March 2000 the country started the process for obtaining debt relief under the HIPC initiative. Malawi is expected to reach the completion point in the HIPC process towards end 2004.

Major Economic Sectors

Agriculture is the predominant sector in the Malawi economy. It contributes nearly a third of GDP, over 90 percent of total export earnings and supports at least 85 percent of the population.

The main subsistence crops are maize, sorghum, millet, pulses and root crops. And the main cash crops include maize, cotton, rice, groundnut, tobacco, coffee and tea. Estate crops include tobacco, tea, sugar, coffee and rubber. In 1981, agricultural reform was a key element of the five-year program of Structural Adjustment agreed with the World Bank but small-holder output continues to lag.

The manufacturing sector accounted for 12.7 percent of GDP in 1999 with the majority of the industries in agro-processing. These include tea processing, cotton grinning , and tobacco factories. Other industries include soap and detergent, cement, pharmaceuticals, garments and textiles, shoes, fertilizers, brewing and distilling. There is scope for expansion and in textile and clothing production and enterprise in new industrial ventures in areas such as labor intensive and agro-processing industries and fertilizer production.

Natural Resources:

The Department of Forestry protects, controls, manages and develops approximately 7.8 million hectares of forest reserves.

Malawi prides itself as the world's custodian of some of the world's tastiest fish, including the chambo (tilapia species). Lake Malawi , one of the world's largest fresh water bodies, has well over 500 species of fish, of which most are edible. The fishing sector contributes 70 percent of protein consumption. While the total landing has satisfied mainly domestic demand, fish resources in Malawi are being depleted at such a rate that government actively encourages commercial fish farming while controlling fishing on the lake.

Various incentives are in place to motivate both local and foreign investors to invest in aquaculture, for both domestic and export markets. Fifty-nine percent of land in Malawi is suitable for aquaculture and areas such as Kasinthula in Chikwawa are already being developed for that purpose. Much potential also exists for the production of tropical fish for aquarists and ornamental purposes, largely for export to the European market.

Mining which in 1998 contributed 0.87 percent of the GDP is currently limited to small-scale production in coal, limestone, rubies and sapphires. Geological surveys provide evidence of mineral deposits including bauxite, asbestos, graphite and uranium, colitis clays among others. As yet none of the these minerals has been mined on commercial scale, although pre-feasibility studies have been commissioned in some areas.

The number of visitors to Malawi has been steadily increasing over the years. An estimated 218,000 people came to Malawi in 1998. Some 45 percent of these came on business, 30 percent to visit friends and family, and the rest were holiday makers.

Development Picture/Donor Coordination

The World Bank, the European Union, and the United Nations are the major multilateral agencies active in Malawi. Britain, Canada, Germany, Japan, the Netherlands, and the United States are the major bilateral donors. Almost all donors are involved in various programs in agriculture, infrastructure, finance, the social sectors and the environment, with a common aim of reducing poverty.

Malawi has an ongoing Poverty Reduction and Growth Facility (PRGF) program with the IMF. Since it was approved in early 2001, disbursements under the IMF PRGF were stalled because of a lack of progress on achieving the macroeconomic stabilization targets of the PRGF program. IMF disbursements resumed this year after a first review of the PRGF was concluded on October 20, 2003.

Malawi's first full Poverty Reduction Strategy Paper (PRSP) was launched in April 2002 and discussed and endorsed by the Board of the World Bank in August 2002. Progress of the implementation of the MPRSP was reviewed through a Joint Staff Assessment (JSA) discussed at the Bank’s Board on October 23, 2003. The JSA concluded that although there was only limited progress in implementation of the MPRSP, the PRSP continued to provide a credible framework for development in Malawi. The Bank is currently involved in designing and negotiating an adjustment lending operation.

Partly because of work on the PRSP, donor coordination in Malawi is improving. Major donors and sectoral donor working groups in the areas of economic management, poverty reduction, water, and agriculture meet regularly.

The last Consultative Group meeting was held in Lilongwe in May 2000. Subject to sustained progress in the implementation of the reform program, a donor meeting is planned to ensure that the financing requirements of the reform program are fully met. The government has also developed a National AIDS Strategy, which donors have pledged to support.

Every village has a market where basic foods and materials can be found. Some of the more common foods are maize, tomatoes, onions, fruits and vegetables in season, salt, cook oil. Cookies, rice, soft drinks, batteries, bread, fish and beef become more common in larger markets. Wholesale and hardware stores carry items in bulk and some of the more specialized items like glass for windows.

South Africa is Malawi's primary supplier of imported goods. This long-standing commercial relationship, comparatively higher product and transport costs, and a lack of historical business ties between the United States and Malawi disadvantage U.S. suppliers. There are a handful of U.S. companies doing business in Malawi, including the three principal processors and exporters of tobacco. U.S. products in significant demand include computers, used clothing, and telecommunications equipment.