National Economic Council of Malawi

 1.0 Introduction

The report discusses economic developments that have taken place in December 2001 and January 2002. In particular, the report reviews the real sector, fiscal and socio-economic developments. It also covers monetary developments, inflation and exchange rates.  

2.0 Agriculture

2.1 Food Situation

Availability of food remains one of the immediate major economic problems the country is facing due to bottlenecks in its transportation and distribution network. As at the close of January, a total of 99,002 tonnes have been dispatched from South Africa. Out of this, 63,960 tonnes have been received in the country and about 35,042 tonnes are in transit. A total of 62,190 tonnes out of the total maize delivered has been sold to ADMARC and private traders at K932,855. Out of this,  38,344 tonnes were sold by ADMARC and 23,846 tonnes by the private traders. The Southern Region had a cummulative figure of 37,795 tonnes sold, Central Region had 20,252 tonnes whilst 4,143 tonnes were sold in the Northern Region. 

The above figures show that the inflow of maize into the country from South Africa is slow thereby making the food crisis a real challenge facing the Government. These delays have been caused by derailment at Beit Bridge, labour unrest in Zimbabwe and congestion of the routes from competing demands of truckers in moving maize, fertilizer and other goods from South Africa. The situation is further aggravated by wash-aways at Nayuchi, Chipoka and Blantyre. However, the Nayuchi and Blantyre wash-aways have been maintained. 

In another development, as from mid-December, Government banned all private traders from buying maize from NFRA because they were charging exorbitant prices ranging from K1,000.00 to K1,500.00 per 50-kilogram bag of maize instead of the K850.00. Now ADMARC is the only authorised firm to buy and sell maize imported by NFRA. 

2.2 Agriculture Exports

2.2.1 Tea

The sales on the Blantyre Auction as at the close of the year 2001 amounted to 14,539,427 kilograms sold at an average price of 87.45 US cents per kilogram as compared to 2000 Tea sales which amounted to 14,993,676 kilograms sold at an average price of 102.01 US cents per kilogram. As at the close of January 2002, about 477,000 kilograms have since been sold at an average price of 83.83 US cents per kilogram and this shows a decline in prices when compared to the price of 86.61 US cents over the same period during 2001. Prospects for tea prices for 2002 remain unpredictable on this basis.  

 2.2.2 Coffee

Malawi’s coffee is sold mainly by private treaty and not through the Auction because quantities produced are so small that Auction would not attract buyers. Quantities of coffee produced in Malawi have declined from 7,700 metric tonnes in 1991 to below 4,000 metric tonnes at present. Export quota system through the International Coffee Organisation (ICO), with a price range, did once ensure a minimum price for the producer. However, liberalisation of the world coffee markets influenced the abolition of economic clauses of the International Coffee Agreement (ICA) which was originally designed to mitigate the effects of the ‘boom and trough’ cycles that had bedeviled coffee marketing for many years. 

The abolition of economic clauses in 1989 and the release of built up stocks in main producing countries have plunged the coffee prices into deep recession. Many major coffee producers in Malawi are abandoning the growing completely. Global market pricing, therefore, continue to be influenced by fundamentals of production, consumption and stocks. At present, international coffee prices are below cost of production.

 Coffee Export Statistics

Source: Tea Association of Malawi

 International commodity prices for tea and coffee on the international market have continued to fluctuate downwards. Reduced prices on the international market have heavily affected returns to most producers. This poor performance of the tea and coffee industries is also in part attributed to disincentives in the form of high taxes on crop inputs, (i.e. chemicals, certain irrigation equipment, etc), ESCOM’s maximum demand tariff to the plantation agriculture industry, etc all of which add significantly to cost of production and therefore lessen competitiveness of tea and coffee on international markets. 

2.3 Crop Production Analysis

The onset of planting rains for 2001/2002 growing season was delayed. Normally the rains start in October in the Southern Region and November in the Central and Northern Regions. However, normal good planting rainfall started in December across the country and have continued up to the present. Despite the delay on the onset of rains, the crop is very satisfactory and should the rains continue, crop production especially maize will significantly increase from the 2000/2001 season. 

2.3.1 Maize

The first round of maize production estimate for 2001/2002 indicate an increase of 16 percent from 1,713,064 metric tonnes in 2000/2001 to 1,989,505 metric tonnes. The increase in production is mainly due to an increase in yields over last year by 18 percent. 

The country will just have enough maize to meet consumption requirements which was estimated at 1,750,333 metric tonnes last year if the current trends in rainfall will continue up to the end of March. 

2.3.2 Tobacco

Tobacco production estimate for the 2001/2002 season indicates an increase in production due to good rains with intermittent sunshine prevailing countrywide. For Burley tobacco, estimates show an increase in volume of about 12.5 to 13 percent depending on continued suitable weather, acute food shortage alleviation and increased barn capacity.

2002 Burley Crop Estimate

(kg)

Source: Tobacco Control Commission

For Flue-cured tobacco, there has been a large increase in the number of farmers growing this year with the re-vitalised smallscale grower schemes in the Central and Northern Regions. The estimated increase in production is an impressive 57.5 percent which will be dependant on final yields.

2002 Flue-Cured Estimates

(kg)

Source: Tobacco Control Commission

Crop development for the Western crops i.e. Northern Division Dark Fired (NDDF) and Southern Division Fired (SDF) tobacco has been fairly good with the favourable weather conditions. If the present weather conditions continue, there should be an improvement in quantities and quality produced. 

2002 Western Crops Estimate

(kg)

NDDF

 SDF

Source: Tobacco Control Commission

2.3.3 Cotton

Cotton production is expected to increase by 8 percent mainly due to increase in total production in Machinga and Shire Valley ADDs of 14 percent. Cotton production in Karonga ADD is estimated to decline by 13 percent. 

2.3.5 Groundnuts

The first round estimates indicate an increase of about 18 percent in 2001/2002 season compared to the 3^rd round crop estimate of 2000/2001 season mainly due to increase in area under cultivation in Karonga (33%), Salima (13%), Blantyre (13%) and Shire Valley ADD registering 33 percent. Increased yields will contribute a 10 percent increase at the national level with all the ADDs registering an expected yield increase ranging from 6 to 19 percent. However, Karonga ADD is estimated to record a decline of 9 percent. 

2.3.6 Cassava

The first round crop estimate for cassava, as compared to last year’s, indicate only a marginal increase of 6 percent in production. This is mainly due to a decline in production by 15 percent in Karonga ADD and 3 percent in Salima ADD caused by a significant decrease in area under cultivation, Karonga [(-29%) Salima (-9%)]. 

2.3.7 Paddy Rice

The first paddy rice estimate shows an increase of 19 percent over 2000/2001 growing season. Furthermore, it shows an increase of 27 percent if compared to the first crop estimate 2000/2001. Hence there will be a significant increase in paddy production, the highest so far. The main contributing factor is the increase of area under cultivation by 15 percent at national level. This is mainly due to significant increase in area under cultivation in Karonga and Salima by 35 and 25 percent, respectively. 

3.0 Monetary Developments

Developments in the monetary authorities accounts at the end of December 2001 were characterised by an increase in the reserve money. Reserve money increase by K928.4 million over the November level to K8,164.7 million, representing an increase of about 13 percent, of which K4,184.5 million is currency outside banks. This figure is beyond the IMF March 2002 target of K7,275.0 million.  

However, there has been a decrease in reserves from July 2001 to November 2001. This decrease largely arose from a fall in the supply of net foreign inflow against increased demand. Gross official reserves declined to 3.2 months of import cover as compared to 3.4 months of import cover in November 2001. With this, the need to contain the liquidity situation should be maintained and of particular importance though is fiscal prudence, without which Advances will revert to exorbitant levels and hence fuel increased liquidity levels in the economy.

Net foreign assets during the month amounted to K8,767.8 million which is K662.6 million lower than the position recorded in November 2001 due to sales of foreign exchange by the Reserve Bank of Malawi to the market. 

However, net domestic credit to Government increased by 58 percent (K1,461.6 million) and amounted to K3,981.5 million as compared to the figure recorded in the previous month. Net credit to Statutory corporations increased from K152.2 million in November to K166.4 million in December. Credit to private sector also rose by 3 percent to K5,289.1 million from K5,130.9 million in November. The situation on domestic credit shows that there is a continued crowding-out of the private sector by Government. 

4.0 Government Budget

Performance in December 2001 and January 2002 show that the Government did not operate within the financial resources raised during the respective months. As such Government continued to borrow from RBM in order to finance its budgetary deficit. This resulted in Government recording budgetary deficit of K998.63 million in December and K600.63 million in January 2002 which was financed by borrowing through Ways and Means Advances. As of December 2001, Government had already borrowed about K5.3 billion through Ways and Means Advances.  

Total revenue and grants in December registered K1,496 million of which K1,304 million was from tax revenues. Revenue for the January 2002 amounted to K3,256.85 million of which K1,817 million was from tax revenues and K574 million was a grant from the Highly Indebted Poor Countries (HIPC) initiative. 

Total expenditure for December amounted to K2,494.63 million of which K694 million was for wages and salaries while other recurrent expenditures amounted to K384 million. Domestic payments comprised of reimbursements to commercial banks in terms of salaries, ORT, advances, development expenditures and interest payments on Ways and Means Advances. Government also paid interest on foreign debt amounting to K275.2 million and K177.8 million on domestic debt. In the month of January 2002, total expenditure amounted to K3,857.477 million of which K784 million was for wages and salaries while other recurrent expenditures recorded K642 million. Interest payment on foreign debt amounted to K176.181 million and K556.5 million on domestic debt.  

Government operations during the two months continued to show that it is not operating within the financial resources being raised. As a result it continued to borrow from RBM in order to finance its budgetary deficit. 

5.0 Exchange Rates

The Kwacha remained more or less stable in December 2001 and closed the month at K67.29 against the US dollar from K67.32 recorded in November, representing 0.043 percent change from the November figure and closed the month of January 2002 at K67.93 representing an increase of about 1 percent. This downward trend is a result of seasonal trends expected in the last quarter of the year and increased demand for foreign currency due to imports of agricultural inputs and consumer goods for the Christmas festive season. The trend is expected to continue as a result of the suspension of aid by some donor countries which has created speculative tendencies in the foreign exchange market. However, exchange rate is expected to pick up as the tobacco season starts in April.

 6.0 Inflation

The rate of inflation as measured by year-on-year percentage changes in the all items national composite consumer price index (CPI) closed the month of December 2001 at 22.1 percent, representing a 2.8 percentage-point decrease compared to inflation rate of 24.9 percent in November and recorded 20.2 percent in January 2002. The December rate was well above the national targeted rate of 10 percent but was lower compared to the rate of December 2000 which stood at 35.4 percent. However, the average inflation figure for 2001 was 27.2 percent which is also lower as compared to the 2000 average figure of 29.5 percent.

 The decline in inflation is due to steady decrease in the overall prices of goods. In 2001, the appreciation of the Kwacha during part of the year impacted positively on import costs, resulting in significant reductions in prices for selected commodities such as petroleum products. Non-food costs consequently declined, outweighing the ‘push factor’ of higher maize prices. However, food inflation continued to rise, largely on account of increasing maize prices though at a decreasing rate. Prices of most cereals and cereal products now seem to have stabilised as they show minimal increases.

 The overall Transport Index for 2001 recorded a decrease from 58.0 percent last year to 37.0 percent in the current year. The decrease is largely due to a number of price reductions in fuels effected this year. 

7.0 Socio-economic Developments

7.1 The Village Housing Scheme

The Government is in the process of coming up with a Village Housing Scheme for Malawi which will have two components. The first component will be a Trust Fund whereby only those who are very poor and cannot afford credit for housing will be supported through housing grants. The second component will be a credit one for those low-income people who need housing and can afford to contribute a high proportion of the total housing construction cost in cash. Three-roomed and two-roomed houses will be built and the Scheme will be launched in March 2002 in Chiradzulu District with twenty pilot houses built.

 7.2 Malawi National Safety Nets Programme

The Government approved the Safety Nets Strategy in 2000 and some safety nets activities have been implemented to provide temporary relief to the most vulnerable and marginalised groups in society by enabling them to enhance their productivity thereby increasing their self-reliance. A broad-based Programme Preparation Team (PPT) was established to design a National Safety Nets Programme (NSNP) concept document. The PPT also served as the Poverty Reduction Strategy Paper (PRSP) Working Group on Safety Nets.

 The Programme, in this regard, will strengthen the participation of the poor and vulnerable in economic growth and national development process. Furthermore, the Programme will serve as a means of boosting the rural economy so as to increase rural income and employment opportunities. The specific objectives of the Programme are: to improve productivity by providing farm inputs to the poor and vulnerable smallholder farmers that have land and labour; to increase income and employment opportunities for the poor and vulnerable groups that have sufficient labour; to increase the income generating and saving capacities of the poor and vulnerable so that they become self reliant over time; to create community assets or infrastructure that will contribute to the socio-economic development of beneficiary communities; to contribute to the reduction of malnutrition; and to increase support to the poor and vulnerable groups who have limited access to factors of production, including people in disaster situation and orphans.

 The Programme will have four components, namely, the public works programme, the safety nets inputs programme, the target nutrition programme and the direct transfers programme. The Public Works Programme will serve as an instrument for promoting the income earning opportunities of the poor in deprived parts of the country. It will also contribute to the creation and improvement of rural infrastructure such as roads, bridges and reafforestation and irrigation facilities.

 The Safety nets Inputs Programme will provide farm inputs to the poor and vulnerable members of society who have land and labour. The purpose is to increase their agriculture productivity on sustainable basis. The Targeted Nutrition Programme will provide supplementary feeding services to malnourished children (especially orphans) and destitute families.  This component will contribute to the reduction of malnutrition, which is a major indicator of poverty, in the country. The Direct Transfers Programme will provide support to the poor and vulnerable groups who have very limited access to factors of production, including people in disaster situations and orphans.

 7.3 Extension of Surtax to Wholesale and Retail Stages

Government has planned to extend 20 percent surtax rate to retail and wholesale stages. This rate is viewed to be potentially much more beneficial to the economy as a whole taking into account the amount of potential revenue that the Government can collect.

 The impact on price level as a result of extending surtax to wholesale and retail stages would be a once-off change in prices which is not inflationary. However, the extension of surtax will have significant burden on various markets as well as tax revenues, relative prices, allocative efficiency, equity and international competitiveness and the poor. 

However, in order to lessen the regressive impact of the surtax extension on the poor, design features such as exemptions and zero-rating of strategic products and services in the surtax extension system, along with the expenditure of revenue need to be put in place so as to protect the poor and enhance equity.

 The extension of surtax to distribution stages would lead to inefficient allocation of resources, where some sectors will benefit at the expense of others. However, the possibilities of equilibrating in the medium to long term can mitigate these inefficiencies through realigning production.