The Malawian economy continued to grow at a fairly rapid, albeit decelerating, pace in 2009. It is estimated that GDP growth averaged 7.6% over the year, after reaching 9.8% in 2008. Economic growth in 2010 will be determined by a sustained global economic recovery, which underpins commodity prices and demand for Malawi’s export products; growth in the agricultural sector; and the government’s management of the foreign reserve position. Economic growth will remain strong, but moderate relative to the high growth of the recent past. We expect GDP growth in 2010 to meet the past six years’ average of 6.6%.
Annual inflation is expected to be higher in 2010 than the average of 8.4% in 2009, at 8.8%. This projection is largely based on the expectation that maize prices, which have a considerable influence on domestic prices, might be marginally higher than the prices a year ago. In addition, a weaker exchange rate against the US dollar, currently at MWK150.80/US$ against MWK140/US$ a year ago, will exert upward pressure on prices of imported commodities, which will have a pass-through effect on domestic inflation. Given the upward bias on inflation, we expect the central bank to keep the interest rate at its current level of 15%.
The foreign exchange rate will largely be determined by the level of foreign reserves. Foreign reserves should rise as a result of expected inflows of donor assistance as well as seasonal export earning inflows, once the new harvest season begins. Nevertheless, we expect that the government will attempt to manage a gradual depreciation of the kwacha during 2010 to MWK190/US$, on the back of the large current account deficit. Uranium exports, which are expected to gain momentum in April this year, will reduce the dependency on agriculture as well as lessen the seasonality of foreign exchange.
Notwithstanding the fairly positive outlook, the economy remains vulnerable to exogenous shocks. We expect economic policy to remain focused on boosting growth through developing the agro-processing and mining sectors, which will require continued improvement of national infrastructure, particularly roads, water and electricity. A slower global recovery could dampen export demand, investor interest and access to foreign capital, while delays in relieving the foreign-exchange shortage could threaten growth, fiscal revenues and investor confidence.