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Market Report Fortnight ending 24th January 2003 Report
01/03
Economic Review: 2002 Vs 2001
The performance of the Malawi economy was below expectations
during 2002 when compared to 2001. Recent figures indicate
that the slow down in economic activities intensified
during 2002 when real GDP contracted by 1.8% compared
to a decline of 1.5% registered in 2001.
The dismal performance of the whole economy, to a larger
extent, reflected developments in the fiscal and external
sectors, which inevitably crippled the performance of
the production sector.
The worsening hunger situation in the country necessitated
the importation of maize and witnessed a surge in government
expenditures. This development created pressure on the
already fragile fiscal budget. The fiscal budget for
2002/03 indicates that estimates for expenditures amounted
to K45.26 billion while domestic revenues and grants
totaled K43.15 billion. Out of the estimated revenues
and grants, foreign grants accounted for K16.01 billion,
representing 37.10% of the whole budget. This outturn
exposed the budget to too much external influence and
inevitably compromised its successful performance.
The withholding of the already budgeted for foreign
aid has therefore created severe imbalances in the fiscal
budgetary operations. This left government with no option
but to intensify borrowing on the domestic front. This
has in the process crowded out the private sector as
evidenced by company closures and down sizing.
The delay in the disbursement of foreign aid also disturbed
the normal build up of the country’s foreign exchange
reserves. This saw poor performance of the official
foreign exchange position when compared to what transpired
in 2001.
The unprecedented increase in the demand for foreign
exchange to accommodate maize imports in an environment
of limited supply created disequilibrium on the foreign
exchange market, which saw the kwacha gradually depreciating
during the whole year and finally nose diving in November
and December 2002.
The outturn in 2002 portrays gloomy prospects for 2003
and therefore calls for prudent and pragmatic fiscal
sector management and close monitoring of developments
on the foreign exchange market by the central bank.
Prudent fiscal policy could help in reducing heavy
reliance on foreign assistance thus enabling economic
managers to effectively influence the budgetary process
in line with economic stability objectives. This being
the case, teething problems encountered in the process
of extending surtax to wholesale and retail should be
ironed out expeditiously.
The central bank should at all costs make sure that
severe depreciation of the kwacha is checked especially
during the lean period to avoid creating unnecessary
panic on the market. The performance of the kwacha is
critical in terming inflationary pressures that are
a threat to macroeconomic stability, which the economy
badly needs in 2003 if the negative trends in real GDP
growth registered during the past two years are to be
reversed.
Financial Sector and Interest Rates
Developments in the financial sector reflected efforts
by the economic managers to try to arrest persistent
economic doldrums characterizing the Malawi economy.
The year saw downward adjustments in the RBM Bank rate
with a view to bring down the cost of borrowing faced
by the production sector. This saw downward adjustments
in lending rates by all the banks and has seen a general
decline in the yield rates for the major money instruments.
According to the auction for treasury bills (TBs) held
on 27th December 2002, the yield rates for 182 days
and 273 days bills did not change from the rates that
were recorded on 20th December 2002 and therefore stood
at 37.20% and 38.58%, respectively. On the other hand,
the rate for the 91 days bill increased to 36.30% from
36.05%.
The need for increased borrowing by the
treasury in an environment of low demand for the government
paper will likely see yield rates for the TBs increasing
during future auctions. Auction results of 20th December
2002 indicate that the treasury revised its borrowing
requirement per auction to K800 million from K700 million.
During this auction, the demand for the paper amounted
to K377.3 million out of which K377.0 million was raised.
And during the auction of 27th December 2002, total
bids at cost value amounted to K245.6 million, of which,
K244.8 million was issued.
On the market for RBM bills on 24th December 2002,
the yield rates showed signs of picking up when the
rate for the 63 days bill increased to 35.49% from 35.09%
registered on 17th December 2002 while that for the
91 days bill increased to 36.34% from 35.98%.
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