© 2025 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contribu- tions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover image: “Absorption” by Elson Kambalu Cover design, interior design and typesetting: Piotr Ruczynski, London, United Kingdom CONTENTS Acknowledgements 7 Abbreviations 8 Overview 9 1 Recent Economic Developments 16 1.1 Global and Regional Context 17 Global growth has been stable, but the regional economic outlook remains uncertain 17 1.2 Recent Economic Developments 20 Per capita growth remained negative in 2024 amid a severe drought and continued foreign-exchange shortages 20 The weak 2023/24 harvest has contributed to record levels of food insecurity 23 Progress towards fiscal consolidation stalled in 2024 24 Rising debt remains a concern amid protracted restructuring negotiations 28 Imports continue to exceed exports, and the current account deficit is expected to widen in 2024 29 Inflation is moderating but still high, as interest rates have remained stable 32 The banking sector remains profitable, but vulnerabilities are emerging 34 Digital payment systems are expanding and becoming more efficient 35 1.3 Medium-Term Economic Outlook 37 Key policy priorities include macroeconomic stability, foreign investment, and resilience to shocks 39 2 Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition: Grow, Protect, and Benefit 42 Malawi’s Mineral Endowment 43 The Mineral Intensity of the Global Energy Transition 43 Current Status of Malawi’s Mining Sector 44 Challenges Facing the Mining Sector 49 Priorities for Mining Sector Development 53 References 58 BOXES BOX 1.1 Fuel shortages underscore the high cost of BOX 1.4 Malawi’s recent fiscal and monetary policies Malawi’s quasi-fiscal subsidies 21 have frequently diverged 33 BOX 1.2 The Mpatamanga Hydropower Storage Project BOX 1.5 Bank lending is on the rise, but credit could have a transformative economic impact 22 standards are tightening 35 BOX 1.3 Debt issuance is above target levels, yet BOX 2.1 Lessons from Kayelekera’s brief initial operation 52 financing gaps persist 26 FIGURES FIGURE O.1 A snapshot of Malawi’s recent economic FIGURE 1.17 …but previous projections have been developments 13 overly optimistic 29 FIGURE 1.1 Global growth remains steady… 17 FIGURE 1.18 The current account deficit narrowed FIGURE 1.2 …amid sustained disinflation 17 in 2023… 30 FIGURE 1.3 After rising sharply over 2020 – 22, FIGURE 1.19 …but its financing sources are not fully commodity prices have stabilized 18 explained 30 FIGURE 1.4 During 2023 – 24, an El-Nino-induced FIGURE 1.20 Export competitiveness is weakening as drought battered Southern Africa 18 the REER appreciates… 30 FIGURE 1.5 Malawi’s economy continues to FIGURE 1.21 … and the trade balance on course to underperform its comparators… 19 widen further 30 FIGURE 1.6 …and poverty levels are stubbornly FIGURE 1.22 Fuel and fertilizer make up a growing highand rising 19 share of total imports 31 FIGURE 1. 7 Weak agricultural output slowed FIGURE 1.23 The exchange rate has remained stable, economic growth in 2024… 20 but reserves have declined 31 FIGURE 1.8 …as crop production hit its lowest level in FIGURE 1.24 Remittances, once a key source of five years 20 foreign exchange, have turned negative 31 FIGURE 1.9 Output of staple grains declined sharply FIGURE 1.25 Food, housing, and utility prices are in 2024 21 driving inflation… 32 FIGURE B1.2.1 The MHSP will have significant FIGURE 1.26 …and the money supply is rapidly increasing 32 positive impacts across the Malawian economy 23 FIGURE 1.27 The monetary policy rate has remained FIGURE 1.10 28 percent of the population faces crisis- unchanged since March 2024... 32 level food insecurity 23 FIGURE 1.28 …while the real policy rate measured FIGURE 1.11 The average household in Southern against headline inflation has remained negative 32 Malawi has reduced the number of daily meals FIGURE 1.29 Domestic yields continued to edge upwards 33 comparedto previous years 24 FIGURE B1.4.1 Malawi’s fiscal and monetary policies FIGURE 1.12 The share of households in Southern are uncoordinated 33 Malawi eating fewer than two meals per day in the post- FIGURE 1.30 Banks in Malawi are highly profitable 34 harvest months has reached its highest level since 2020 24 FIGURE 1.31 Personal loans and trade credit FIGURE 1.13 Rigid expenditures continue to limit the dominate private-sector lending 34 available fiscal space 26 FIGURE 1.32 Since the 1990s, deficits during election FIGURE B1.3.1 Actual debt issuance significantly years have been 74 percent higher than during the exceeded target levels… 26 preceding four years 38 FIGURE B1.3.2 …with a sharp surge in July and August 26 FIGURE 1.33 Zambia’s recovery holds lessons for Malawi 38 FIGURE 1.14 Exchange-rate pressures and contingent FIGURE 2.1 Most mineral deposits in Malawi are still liabilities have boosted the debt 28 at the greenfield stage 43 FIGURE 1.15 High-cost Treasury notes have primarily FIGURE 2.2 Metals intensity of clean energy financed the fiscal deficit 28 technologies and conventional fossil fuel technologies 44 FIGURE 1.16 The public debt stock is expected to FIGURE 2.3 Mineral demand for clean energy decline in 2024... 29 technologies is expected to grow rapidly 44 FIGURE 2.4 Mineral deposits are distributed across FIGURE 2.6 If it materializes, the Kangankunde Malawi’s territory 45 project is expected to have the greatest impact on exports 48 FIGURE 2.5 Lead times for major pipeline projects, FIGURE 2.7 The mining projects in the pipeline will baseline and best-case scenarios 46 greatly increase energy demand 51 TABLES TABLE O.1 Priority Policy Areas and Key Actions 12 TABLE 2.1 Risks heavily influence the pace of project TABLE 1.1 FY2024/25 Midyear Budget Performance 24 operationalization 47 TABLE 1.2 Fiscal Accounts 27 TABLE 2.2 World Bank Projections for Pipeline Mining Projects 47 TABLE 1.3 Priority Policy Areas and Key Actions 40 TABLE 1.4 Key Macroeconomic and Financial Indicators 41 7 ACKNOWLEDGEMENTS The Malawi Economic Monitor analyzes economic and structural development issues in Malawi. This 20th edition was published in January 2025 and is part of an ongoing series published twice per year. The MEM aims to foster informed policymaking and a robust debate regarding the key challenges that Malawi faces in its efforts to achieve inclusive and sustainable economic growth. This edition of the Malawi Economic Monitor was prepared by Jakob Engel (Senior Country Economist, Task Team Leader), Anwar Mussa (Economist, co-Task Team Leader), Efrem Zephnath Chilima (Senior Private Sector Specialist, co-Task Team Leader), Tsolmon Adiya (Senior Mining Specialist), Martin Lokanc (Senior Mining Specialist), Lina Marcela Cardona (Senior Economist), Innocent Njati Banda (Financial Sector Specialist), Miles McKenna (Country Officer), Charles Douglas-Hamilton (Consultant), and Alexandra Soininen (Consultant). The report was edited by Sean Lothrop (Consultant). Abha Prasad (Practice Manager, Economic Policies), Robert Schlotterer (Practice Manager, Energy and Extractives), Firas Raad (Country Manager, Malawi), Milena Stefanova (Operations Manager, Malawi), and Nathan M. Belete (Country Director, Malawi) provided overall guidance. The team wishes to thank Aghassi Mkrtchyan (Lead Country Economist) and peer reviewers Elisa Gamberoni (Senior Economist) and Remi Pelon (Senior Mining Specialist) for their constructive input. This report benefited from input provided by representatives of the Ministry of Finance and Economic Affairs; the Reserve Bank of Malawi; the Ministry of Mining; the National Statistical Office; other gov- ernment ministries, departments, and agencies; and the International Monetary Fund. The team would also like to thank representatives of the private sector, civil society organizations and development part- ners in Lilongwe and Blantyre for their helpful contributions. Henry Chimbali (External Affairs Officer), Lewis Junie Msasa (Consultant), Karima Laouali Ladjo (Team Assistant), and Demister Misomali (Team Assistant) provided assistance with external communications, design, and additional production support. The findings, interpretations, and conclusions expressed in this publication do not necessarily reflect the views of the World Bank’s Executive Directors or the countries they represent. The report is based on information current as of January 10, 2025. The World Bank team welcomes feedback on the structure and content of the Malawi Economic Monitor. Please send comments to Jakob Engel (jengel@worldbank.org), Efrem Chilima (echilima@ worldbank.org) and Anwar Mussa (amussa@worldbank.org). 8 ABBREVIATIONS AIP Affordable Inputs Programme MITASS Malawi Interbank Transfer and Settlement ATM Agriculture, Tourism and Mining System BADEA Arab Bank for Economic Development MMRA Mining and Minerals Regulatory Authority BoP Balance of Payments MoFEA Ministry of Finance and Economic Affairs DRM Disaster Risk Management MT Metric Ton DSA Debt Sustainability Analysis MW Megawatt ECF Extended Credit Facility MWK Malawian Kwacha EMDE Emerging Market and Developing Economy NOCMA National Oil Company of Malawi ETM Energy Transition Minerals NPL Non-Performing Loan FDI Foreign Direct Investment NSO National Statistical Office FY Fiscal Year OECD Organization for Economic Co-operation and G2G Government-to-Government Development GDP Gross Domestic Product OHS Occupational Health and Safety GIS Geographic Information System PFM Public Financial Management GSD Geological Survey Department PPDA Public Procurement and Disposal of Public IDA International Development Association Assets Authority IFC International Finance Corporation PPP Purchasing Power Parity IFMIS Integrated Financial Management and RBM Reserve Bank of Malawi Information System REER Real Effective Exchange Rate ILO International Labour Organisation ROA Return on Assets IMF International Monetary Fund ROE Return on Equity IPC Integrated Food Security Phase Classification SADC Southern African Development Community MDA Mining Development Agreement SOE State-Owned Enterprise MEM Malawi Economic Monitor TDB Trade and Development Bank MEPA Malawi Environmental Protection Agency UN United Nations MERA Malawi Energy Regulatory Authority US$ United States Dollar MFMod World Bank Macroeconomic and Fiscal Model WEO World Economic Outlook MHSP Mpatamanga Hydropower Storage Project 9 OVERVIEW Low growth and high inflation underscore Malawi’s economic vulnerability Malawi’s economic recovery remains fragile due to the slow implementation of macroeconomic adjustment reforms and a series of recent shocks. Gross domestic product (GDP) is expected to have grown by only 1.8 percent in 2024, a downward revision from 2.0 percent growth projected in April 2024. With the population growth rate at 2.6 percent, this marks the third straight year of declining GDP per capita. The El Niño-induced drought in early 2024 has adversely affected agricultural output, which is expected to have contracted by 2.0 percent in 2024. Food insecurity remains a major concern due to weak harvests from 2022 to 2024 and the likelihood of a challenging 2024-25 season. The 2023-24 drought contributed to a 21 percent drop relative to the previous season in the production of cereal grains, which fell to 3.8 million metric tons (MT). Maize out- put reached 2.7 million MT, falling short of the 3.3-3.5 million MT required for domestic consumption. As a result, approximately 5.7 million people—or 28 percent of the population—are expected to face crisis-level food insecurity between October 2024 and March 2025. In 2023, 4.4 million people experi- enced acute food insecurity, due in part to continued challenges around access to inputs, as well as the impact of Cyclone Freddy, which disrupted agricultural production in the southern region. Limited fertilizer availability, including for beneficiaries of the Affordable Input Program (AIP), may negatively impact the 2024-25 agricultural season. By the start of the planting season in December 2024, only 23.8 percent of the required 105,000 MT of fertilizer had been accessed. Inflation is gradually easing but remains high due to rising food, housing, and utility prices, as well as the rapid growth of the money supply. After reaching a peak of 35 percent in January 2024, head- line inflation fell to 27.0 percent in November 2024. Rising prices for food, housing, and utilities con- tinue to drive inflation, and underlying price pressures remain elevated. This situation has been exacer- bated by a significant increase in the money supply, which grew by 51 percent year-on-year in October 2024, driven in part by monetary financing of the fiscal deficit. Malawi’s banking sector remains highly profitable, as it benefits from government borrowing and high interest rates, but vulnerabilities are emerging. In October 2024, banks reported a 5.9 percent return on assets (ROA), up from 5.0 percent a year earlier, and a 52.1 percent return on equity (ROE), both well above the global average. However, the banking sector’s preference for safer investments, espe- cially government borrowing, along with high levels of exposure to relatively few large clients and the concentration of lending in specific sectors, could pose risks. Despite high profits and apparent sta- bility, stress tests reveal vulnerabilities. While the Reserve Bank of Malawi (RBM) has determined that Malawi’s banking sector could weather individual shocks, multiple simultaneous shocks could present a threat. Continued vigilance, risk management, and diversification will be crucial to reinforce resilience. Reform momentum has stalled, while fiscal and external imbalances continue to increase, and the cost of inaction is rising One year since the start of the government’s new macroeconomic reform program, supported by an IMF Extended Credit Facility (ECF) and development partner budget support, efforts to address rising fiscal and external imbalances have faltered. Existing structural challenges are compounded Overview 10 by continued overspending and debt accumulation, which impede the country’s long-term develop- ment prospects. Quasi-fiscal activities conducted outside the budget—including RBM sales of foreign exchange at the official rate, especially to purchase fuel and fertilizer—represent implicit subsidies, while the mounting arrears of loss-making state-owned enterprises (SOEs) represent a significant fis- cal risk, as the government may ultimately be required to assume these liabilities. Foreign-exchange reserves are declining, as inflows from official exports, foreign investment, remit- tances and grants have failed to keep pace with import demand. Foreign exchange is tightly rationed, and there is a growing spread between the official exchange rate, which has remained largely static throughout 2024, and the rising parallel market rate. Recent measures to further strengthen foreign exchange controls may help temporarily bolster official reserves, but could also have the unintended consequence of further increasing capital outflows, reducing liquidity in the formal foreign exchange market and discouraging private sector investment. As a result, the cost of inaction on the macroeco- nomic reform agenda is mounting. The implementation of the budget for the 2024/25 fiscal year (FY) reveals significant slippages, with revenue outturns in particular falling short of expectations. The mid-year budget amendment in- cluded some limited revenue measures that are unlikely to alter the overall trajectory of the budget bal- ance, while further wage increases are likely to exacerbate fiscal challenges. Meanwhile, debt vulnera- bilities will likely persist amid slow external debt restructuring and rising domestic debt levels, while interest payments and other statutory expenditures will continue crowding out the scope for produc- tive investment. Moreover, the implementation of key public financial management (PFM) reforms, in- cluding the addition of human resource management to the Integrated Financial Management and Information System (IFMIS), is progressing slowly. To maintain fiscal stability, the government will need to contain expenditures in the second half of the fiscal year and prepare a budget for FY2025/26 that re- turns Malawi to the fiscal consolidation path set out in the ECF-supported reform program. The current account deficit is projected to widen again in 2024. Revised balance-of-payments (BoP) data show that after expanding consistently for over four years the current account deficit narrowed in 2023. Higher net exports and development partner inflows drove the improvement in the deficit. The November 2023 devaluation of the Malawian kwacha (MWK) aligned it more closely with the par- allel-market rate and caused the real effective exchange rate (REER)1 to fall sharply, temporarily enhanc- ing export competitiveness. However, amid high inflation, elevated government spending and contin- ued exchange-rate rigidity, the REER has since resumed its upward trend, growing by 12 percent from November 2023 to November 2024. Driven by distortionary policies, the appreciation of the REER is contributing to the erosion of external competitiveness. Preliminary 2024 estimates point to a widen- ing merchandise trade deficit caused by rising imports coupled with the underperformance of most exports except tobacco. Responsible fiscal and monetary policies are crucial to maintain macroeconomic stability and enable long-term growth Malawi’s economy is in a highly vulnerable position. While GDP growth for 2025 is currently projected to exceed 4 percent, supported by a stronger agricultural season and robust manufacturing output, persistent foreign-exchange shortages continue to pose serious challenges for the economy’s recov- ery. Ongoing investments in commercialized agriculture, energy and the mining sector are expected to boost economic activity and increase exports, but their benefits will take years to materialize and 1 The REER measures a currency’s value relative to a weighted average of several foreign currencies. Overview 11 will require sustained macroeconomic stabilization. The medium-term outlook is subject to signifi- cant risks, especially climate-related shocks and the continued slow pace of macroeconomic adjust- ment and reform. Prudent macroeconomic management will be especially critical in the run up to the 2025 elections. Over the past 30 years and five electoral cycles, fiscal deficits during election years were on average 74 percent higher than in the four preceding years. Given Malawi’s existing economic vulnerabilities, a similar lapse in budget discipline would severely compromise macroeconomic stability. Depleted buff- ers and persistent fiscal and current account deficits leave Malawi susceptible to external shocks and other crises. Moreover, election-year spending pressures could heighten the risk of unsustainable bor- rowing. High-interest commercial debt contracted in the run up to the 2019 election, which was used primarily to stabilize the exchange rate and ensure a steady fuel supply, is a major factor in Malawi’s current external debt crisis and the subject of ongoing restructuring negotiations with commercial creditors. To avoid deepening Malawi’s debt distress, any new borrowing must be consistent with the PFM Act and the Public Procurement and Disposal of Public Assets (PPDA) Act, Malawi’s Medium-Term Debt Management Strategy, and IMF and World Bank programs. This 20th edition of the Malawi Economic Monitor (MEM) finds that the cost of inaction is rising, as continued delays in addressing widening fiscal and current account deficits increase the scale of the eventual adjustment and heighten the risk of further deterioration. Conversely, implement- ing announced stabilization and adjustment reforms could enable the Malawian economy to achieve significantly higher growth rates over the next five years, as planned large-scale investments material- ize. These investments would create numerous jobs, boost exports and revenues, and catalyze further foreign direct investment (FDI). Realizing Malawi’s significant medium-term growth potential and avoiding a further weakening of the economy will require urgent reforms in three areas (Table O.1): i) Restoring macroeconomic stability: Planned macro-fiscal reforms must be fully implemented and sustained over time, with a focus on returning to fiscal consolidation targets both in the current year and FY2025/26, finalizing external debt restructuring and containing the growth of domes- tic borrowing, supporting the accumulation of reserves by implementing announced exchange- rate reforms, and controlling inflation by limiting the growth of the money supply and halting the monetary financing of the fiscal deficit. ii) Creating the conditions for increased private investment and exports: Increasing investment is critical for the sustainable growth of the economy. In a context of limited fiscal resources, the success of the Agriculture Tourism and Mining (ATM) Strategy will be determined by whether the private sector is willing to invest and whether more is done to ensure that the limited pub- lic funds are used well. Key measures include eliminating implicit fuel and energy subsidies to reduce the risk of shortages, developing an effective management system for mining revenues, and phasing out foreign-exchange surrender requirements. iii) Building resilience and protecting poor households: With domestic food production continuing to fall far short of consumption, it will be important to advance the process of reforming the AIP and repurposing agriculture expenditure towards more activities that increase productivity and resilience. Fully implementing the Disaster Risk Management (DRM) Act, including the DRM Fund, and finalizing and implementing the Energy Compact will be vital to strengthen disaster preparedness and enable investments in affordable energy access. Overview 12 TABLE O.1  Priority Policy Areas and Key Actions 1. Restoring macroeconomic stability Tighten expenditure controls and implement substantive tax policy and adminis- Resume fiscal consolidation Short tration reforms to resume fiscal consolidation. Conclude external debt restructuring to sustainably deliver debt relief and con- Finalize debt restructuring Medium tain domestic borrowing. Fully implement the exchange-rate reforms announced in the November 2023 Bolster foreign-exchange reserves Short RBM circular and continue reducing foreign-exchange sales to the market. Control inflation Limit the growth of the money supply and halt monetary financing of the deficit. Medium Creating conditions 2.  for increased investment and exports Eliminate implicit fuel Implement the existing formula to ensure cost-reflective fuel and energy prices Short and energy subsidies and reduce MERA, NOCMA and ESCOM arrears. Develop transparent mining Develop suitable mining revenue management arrangements to (i) ensure high Medium revenue management systems savings and investment and (ii) manage pressures for consumption spending. Phase out foreign-exchange Set credible targets to phase out surrender and conversion requirements, start- surrender and conversion ing with the 30 percent foreign-exchange surrender requirement on exports Short requirements earnings and holdings, especially in priority sectors. Building resilience 3.  and protecting the poor Reform AIP subsidies to support Continue reforming the AIP fertilizer subsidy to reduce fiscal burden, improve tar- more resilient and productive geting and rebalance agricultural spending towards sustainable farming prac- Medium agriculture tices and irrigation. Implement policies to build resilience, including the Disaster Risk Management Prepare for the next disaster Medium Act, and establish a disaster fund. Finalize and implement Energy Compact to enable investments that would signif- Expand energy access Medium icantly increase energy access by 2030. Initiate Strengthen Sustain Overview 13 FIGURE O.1  A snapshot of Malawi’s recent economic developments a. Malawi’s economy continues to underperform relative to its neighbors and the average b. Crop production hit its lowest level in five years following a severe drought and delays in for Sub-Saharan Africa input distribution Real GDP growth rates 32 8 28 6 24 20 4 MT, million 16 Percent 2 12 12 0 8 8 4 4 −2 0 0 20 10 20 11 20 12 20 13 20 /14 20 19 20 20 20 18 /24 20 09 20 15 20 16 20 /08 20 17 20 /21 −4 20 /22 20 /23 10/ 16/ 11/ 12/ 14/ 18/ 17/ 15/ / 19/ / 20 13 09 23 21 22 2019 2020 2021 2022 2023 2024e 2025f 08 07 20 Mozambique Tanzania Zambia SSA Malawi Crop production Average c. A large share of rigid expenditures, especially for interest payments, constrains the fiscal  ith deficits 74 percent higher in election years than in the preceding four years, pre- d. W space for public investment election spending poses substantial fiscal risks Expenditure items (domestic revenue) Fiscal balance 100 2 0 80 −2 Percent of GDP 60 −4 Percent 40 −6 −8 20 −10 0 2020/21 2021/22 2022/23 2023/24 2024/25 2024/25 −12 Approved Revised 199 5 199 97 20 99 20 /01 20 03 20 05 20 07 20 9 20 11 20 13 20 5 20 17 20 19 24 20 /21 (R /23 d) 9 1 /0 10/ 16/ 12/ 14/ 18/ ise 6/ / 4/ / 8/ / 0 00 06 /25 22 02 04 08 2 199 ev Compesation of employees Interest Pension and Gratuity Subventions Fiscal balance Election years 20 e. The trade deficit is likely to widen further in 2024 amid high imports and nflation remains elevated as the money supply continues to grow f. I underperforming exports Inflation and broad money (change year-on-year) Merchandise trade 55 200 50 100 45 40 0 35 30 Percent −100 US$, million 25 −200 20 −300 15 10 −400 5 −500 0 05/ 19 09 019 01/ 19 05 020 09 20 01/ 20 05 021 09 21 01/ 021 05 022 09 22 01/ 22 05 023 09 23 01/ 23 05 024 09 24 24 06 18 11/ 8 04 18 09 19 02 019 07 20 12/ 20 05 20 10/ 21 03 021 08 22 01/ 22 06 23 11/ 3 04 23 09 24 24 2 1 /20 20 /20 /20 /20 20 /20 20 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 20 /20 20 /20 /20 /20 /20 20 2 /2 2 2 /2 2 2 2 2 01/ 01/ Imports Exports Trade Balance CPI Broad Money Sources: World Bank staff based on MoFEA, RBM, NSO and MoA data. Notes: SSA=Sub-Saharan Africa, CPI=Consumer Price Index. Overview 14 Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition: Grow, Protect, and Benefit Malawi possesses a wealth of energy-transition minerals (ETM) that could provide vast development opportunities, but only if key constraints are addressed. Improving the environment for mining invest- ment would significantly alleviate fiscal pressures, stimulate economic growth, create high-quality jobs, and potentially kickstart a broader virtuous cycle of investment and growth. The Special Topic section of this edition of the MEM explores how the government can create an enabling environment for min- ing investment and how leveraging ETM resources could impact the Malawian economy. Key reforms are prioritized according to the “grow, protect, and benefit” approach, which is designed both to attract greater investment and to increase the sector’s impact on the country’s development. Malawi’s ETM endowment presents transformative opportunities The global shift towards renewable energy and electrification has led to a surge in demand for min- erals such as graphite, titanium, uranium, and rare earth elements, all of which are found in abun- dance in Malawi. Developing the mining sector can significantly boost Malawi’s GDP, generate foreign exchange, and create high-paying jobs. Mining projects can also anchor transformative investments in infrastructure, especially in energy and transportation. For example, the development of new renew- able power generation has enormous potential to boost the broader economy and especially the min- ing sector. Mining development in rural areas can support the growth of local communities by creat- ing jobs and offering opportunities for small businesses. Despite its vast potential, major challenges hinder the development of Malawi’s mining sector. The government has limited experience administering large mining projects, and concerns around weak governance, lengthy permitting processes, and uncertain regulatory frameworks deter investors. There is also a need for increased capacity to design, implement, and operate large-scale public investment projects necessary for the sector’s growth. Inadequate energy and transportation infrastructure, such as poor road networks, limited rail connections, and an unreliable power supply, increase operational costs and hinder project development. Outsized expectations for immediate socioeconomic benefits from mining often clash with the realities of complex operations, leading to frustration and disillusionment. Fluctuations in global metal prices create unpredictable revenue streams, complicating the planning and budgeting pro- cess. The opaque and thinly trade nature of many of the minerals Malawi is endowed with, together with the dominant position of some countries in their production creates risks for financiers of these mines, and complexity for the operators who need to advance technical studies while simulta- neously aligning sales agreements in parallel to their financing. Finally, a lack of specialized educa- tional programs and experienced professionals in mining-related fields hampers the sector’s develop- ment. The following measures are crucial to address these challenges and support the development of Malawi’s mining sector. Pillar 1: Enabling the Mining Sector’s Growth First, it is essential to expedite the development of projects in the pipeline by accelerating the negotiation of mining development agreements (MDAs) and streamlining permitting processes. Staff training and the engagement of specialized transaction advisors will be crucial to enhance the government’s capacity to negotiate MDAs. Developing comprehensive investment-promotion plans, de-risking the sector through robust, publicly available geoscientific research, establishing transpar- ent data-sharing arrangements, and creating efficient permitting processes will attract more inves- tors. Effectively monitoring large-scale operations and managing MDAs will also require improved Overview 15 government capacity in sectoral institutions. Investments in road networks, rail connections, and renewable energy systems will reduce operational costs and facilitate the sector’s growth. Finally, the updated mining policy and the legislative and regulatory framework will foster a more stable and pre- dictable business environment. Pillar 2: Social and Environmental Protection The Malawi Environmental Protection Agency (MEPA) and Ministry of Mining require adequate resources to effectively monitor mining activities and enforce environmental regulations. Making all documents related to mine development publicly available will increase transparency and support community-based monitoring. Occupational health and safety (OHS) standards relevant to the min- ing sector and updated regulations should be reviewed in order to align these with international best practices. Promoting stakeholder engagement by establishing a functional platform for multi-stake- holder dialogue will improve communication and build trust. Strengthening environmental policies, laws, and regulations will help protect people and ecosystems. Pillar 3: Benefit Realization and Management The largest and most immediate benefit of mining development will be in the form of government revenues from taxes and equity dividends. Substantial gains will also be generated through capital investments, spillover effects on other sectors, and increased human capital. Strengthening customs and tax administration by providing targeted training for customs officers, modernizing digital sys- tems, investing in infrastructure, and fostering cross-sectoral coordination are critical to maximize revenue collection. Analyzing skills gaps, establishing specialized educational programs, and encour- aging apprenticeships and internships will help build a skilled workforce. Implementing policies that incentivize local hiring, procurement, and partnerships will ensure a broader distribution of economic benefits. Over time, encouraging greater domestic value addition will expand job creation and diver- sify exports. Finally, introducing measures to insulate the budget from the cyclicality of mineral rev- enues and ensure the maintenance of adequate foreign-exchange reserves will mitigate the impacts of price volatility. Conclusion Malawi has a unique opportunity to leverage its mineral wealth to drive sustainable economic de- velopment. By addressing the challenges and prioritizing the actions outlined in the MEM’s Special Topic section, the government can create a modern and fit-for-purpose framework for the mining sec- tor that attracts greater investment, boosts domestic revenue, and ensures a broad and equitable dis- tribution of benefits. 1 RECENT ECONOMIC DEVELOPMENTS 17 1.1 GLOBAL AND REGIONAL CONTEXT Global growth has been stable, but the regional economic outlook remains uncertain The global economic recovery has remained broadly resilient amid sustained disinflation. Despite sharp and synchronized monetary tightening across major economies, fears of a renewed downturn have eased. Global GDP growth stabilized at 2.7 percent in 2023 and is expected to remain at that level through 2025 (World Bank 2025a, forthcoming), albeit still below the pre-pandemic average of nearly 3.0 percent during 2010 – 19 (Figure 1.1). Due in part to falling commodity prices and the effects of mon- etary tightening, global inflation is projected to decline from a peak of 9.4 percent in 2022 to 3.5 per- cent by end-2025 (Figure 1.2), in line with the pre-pandemic average of 3.6 percent (IMF 2024). With inflation falling, major central banks have started lowering interest rates, which has eased financing conditions and further supported the global recovery. However, risks remain tilted to the downside due to policy uncertainty, escalating trade disputes, resurgent inflation in some areas, and slow- er-than-expected economic activity in major economies (World Bank 2025a, forthcoming). FIGURE 1.1  Global growth remains steady… FIGURE 1.2  …amid sustained disinflation Real GDP growth Inflation 8 20 6 16 4 2 12 Percent Percent 0 8 −2 4 −4 −6 0 2019 2020 2021 2022 2023 2024e 2025f 2019 2020 2021 2022 2023 2024e 2025f EMDEs SSA Advanced economies World EMDEs SSA Advanced economies World Source: World Bank 01/2025 Global Economic Prospects. Source: IMF 11/ 2024 World Economic Outlook. Notes: e= estimate, f=forecast, EMDEs= Emerging Markets and Developing Economies. Notes: e= estimate, f=forecast, EMDEs= Emerging Markets and Developing Economies. Emerging markets and developing economies (EMDEs) continue to face an uncertain economic out- look. Growth in India and Vietnam remained resilient, driven by strong demand in technology and semi-conductor sectors, as well as robust investment in artificial intelligence and digital infrastruc- ture (IMF 2024). However, China’s growth estimate for 2024 has been revised downward to 4.8 percent, falling short of its target of 5.0 percent amid weak consumer confidence and a sharp downturn in the property market. Growth estimates for some Latin American and African countries have also been revised downward due to political instability, climate-related disasters, and rising debt levels. In con- trast to trends in many advanced economies, inflationary pressures fueled by higher food and energy prices persist in many EMDEs, particularly in Africa and parts of Latin America, are prompting central banks in these regions to raise interest rates. 1. Recent Economic Developments 18 Escalating geopolitical tensions have not adversely impacted commodity prices thus far. Following three years of volatility, the World Bank’s commodity price index forecasts a decline in prices in the near term (Figure 1.3). Average commodity prices are projected to fall steadily during 2024 – 26 to reach their lowest level since 2020, though they will remain above the 2015 – 19 average. Energy prices, including oil, are expected to drop in 2025 owing to oversupply (World Bank 2024a). Metal prices are projected to decline modestly over the next two years, while agricultural prices should decrease due to bumper crops in certain regions. Falling energy and food prices are likely to ease inflationary pressures, particu- larly in EMDEs, which could enable central banks to loosen their monetary stance. However, adverse weather conditions, major ongoing conflicts, and rising trade tensions could spark renewed inflation and slow economic activity. At the regional level, the 2023 – 24 El Niño phenomenon caused significant weather disruptions across Southern Africa, adversely impacting agriculture, water availability, and overall economic stabil- ity. Extreme drought conditions (Figure 1.4) led to the declaration of states of emergency in Botswana, Lesotho, Malawi, Namibia, Zambia, and Zimbabwe (OCHA 2024). According to the Southern African Development Community (SADC), over 61 million people are at risk of severe hunger due to disrup- tions in the agricultural cycle and decreased yields for staple crops like maize, which have put signifi- cant upward pressure on food prices.2 The World Bank’s October 2024 Macro-Poverty Outlook revised GDP growth rates in affected countries downwards relative to the previous edition in April 2024 (Figure 1.5). Malawi’s growth rate for 2024 is expected to be the lowest among its neighbors, and the national poverty rate is set to increase (Figure 1.6). FIGURE 1.3  After rising sharply over 2020 – 22, commodity FIGURE 1.4  During 2023 – 24, an El-Nino-induced drought prices have stabilized battered Southern Africa Commodity prices Seasonal rainfall, 10/2023 – 03/2024 150 140 130 United Republic of Tanzania 120 110 Comoros 100 Angola Malawi Index, 100 = 2022 Zambia 90 80 Madagascar Zimbabwe 70 Namibia 60 Botswana Mozambique 50 Eswatini 40 30 Lesotho South Africa 20 05 019 09 19 01/ 019 05 020 09 20 01/ 20 05 021 09 21 01/ 021 05 022 09 22 01/ 22 05 023 09 23 01/ 23 05 024 09 24 24 /20 /20 /20 /20 /20 /20 /20 /20 /20 /20 2 /2 2 /2 2 2 2 2 01/ Standardized Precipitation Index (SPI) (CHIRPS) 10/2023 to 03/2024 Energy Agriculture Metals and minerals Commodity price index Extremely Severely Moderately Mild Normal Mild Moderately Severely dry dry dry dry wet wet wet Source: World Bank 11/2024 commodity markets outlook. Note: Monthly in U.S. dollar terms. Last observation is September 2024. Source: United Nations Office for the Coordination of Humanitarian Affairs (OCHA). 2 The likelihood of a significant decline in agricultural production had been forecast by many experts at the start of the grow- ing season (see, for example, Anderson et al. 2023). 1. Recent Economic Developments 19 FIGURE 1.5  Malawi’s economy continues to underperform FIGURE 1.6  …and poverty levels are stubbornly high its comparators… and rising Real GDP growth rates Share of people living on less than US$2.15 per day 8 80 75 6 70 4 65 Percent Percent 2 60 55 0 50 −2 45 −4 40 2019 2020 2021 2022 2023 2024e 2025f 2019 2020 2021 2022 2023 2024e 2025f Mozambique Tanzania Zambia SSA Malawi Mozambique Tanzania Zambia Malawi Source: IMF 11/ 2024 WEO. Source: World Bank 11/2024 Macro-Poverty Outlook. Notes: e= estimate, f=forecast. Notes: e=estimate, f=forecast. 20 1.2 RECENT ECONOMIC DEVELOPMENTS Per capita growth remained negative in 2024 amid a severe drought and continued foreign-exchange shortages Malawi’s economic growth rate ticked up slightly in 2024 but remains low due to shocks and the slow pace of macroeconomic reforms. Malawi’s economy is expected to grow by 1.8 percent in 2024, below the 2.0 percent projected in April 2024. With the population growing at about 2.6 per- cent, this marks the third consecutive year of declining per capita income (Figure 1.7). The El Niño- induced drought negatively impacted agricultural output. Crop production fell from 29 million met- ric tons (MT) in the 2021/22 season to 21 million in the 2022/23 season and 19 million in the 2023/24 season (Figure 1.8). FIGURE 1. 7  Weak agricultural output slowed economic FIGURE 1.8  …as crop production hit its lowest level growth in 2024… in five years Sectoral contribution to GDP growth 32 5 28 44 24 3 20 MT, million 16 Percent 2 12 12 1 8 8 00 4 4 −1 0 0 2020 2020 2021 2021 2022 2022 2023 2023 2024e 2024e 2025p 2026p 20 10 20 11 20 12 20 13 20 14 20 19 20 20 /24 20 09 20 18 20 /08 20 15 20 16 20 17 20 /21 20 /22 20 /23 10/ 16/ 11/ 12/ 13 / 18/ 14/ 17/ / 15/ 19/ / 20 09 23 21 22 08 07 20 Agriculture Industry Services Net taxes on production Real GDP growth Population growth Crop production Average Source: World Bank MFMod. Source: World Bank staff based on Ministry of Agriculture (MoA) APES data. Food insecurity worsened in 2024 as food production fell short of domestic demand. The produc- tion of staple grains, including maize, rice, pulses, and other cereals, dropped to 3.8 million MT in the 2023 – 24 season, down 21 percent from the previous year. Maize output amounted to just 2.7 million MT, far below the estimated 3.3 – 3.5 million MT required for domestic consumption (Figure 1.9). In addition to the drought, delays in fertilizer availability, including for AIP beneficiaries, also contributed to the weak agricultural season. These challenges persist, and only 23.8 percent of the 105,000 MT of AIP-procured fertilizer had been accessed at the start of the planting season in December 2024. 1. Recent Economic Developments 21 Limited access to foreign exchange continues to impede ac- FIGURE 1.9  Output of staple grains declined sharply tivity in the industrial and services sectors. The services sec- in 2024 tor expanded by an estimated 3.3 percent in 2024, driven by im- 6 proved performance in electricity, construction, information and communication, financial and insurance activities, and ed- 5 ucation. The industrial sector grew by 2.1 percent. Continued shortages of foreign exchange and a rising exchange-rate pre- 4 mium on the parallel market continue to constrain imports of MT, million raw materials and other production inputs. 3 An insufficient supply of foreign exchange, rising arrears due 2 to implicit subsidies through delayed price adjustments, and logistical challenges have contributed to multiple protract- 1 ed fuel shortages. Regulated pump prices3 are too low to cover escalating import and transportation costs, exacerbating cash 0 constraints and straining the supply chain. Although suppli- 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 ers have exported fuel to Malawi on open credit, mounting arrears have led to the withdrawal of credit lines and recur- Maize Rice Other cereals Pulses rent fuel shortages. The state-run National Oil Company of Source: World Bank staff based on MoA APES data. Malawi (NOCMA), which supplies over 50 percent of the coun- try’s fuel, and private oil-marketing companies continue to incur losses, and NOCMA’s arrears exceed US$70 million. Underpricing results in excessive domestic consumption, incentivizes smuggling, and drains foreign-exchange reserves. These implicit subsidies are a key driver of Malawi’s deepening fis- cal challenges (Box 1.1). BOX 1.1  Fuel shortages underscore the high cost of Malawi’s quasi-fiscal subsidies Malawi’s fuel shortages result in part from the government’s foreign-exchange market is a major example, as the RBM sells decision to set fuel prices below cost recovery. These policies foreign-exchange reserves at the official rate, which is signif- have resulted in MWK 785 billion in losses for petroleum import- icantly below the rate at which most market participants can ers. While the Malawi Energy Regulatory Authority (MERA) is cov- access foreign exchange. Between 2019 and 2024, the RBM sold ering these losses, importers are withholding MWK 330 billion in over US$1.1 billion in foreign exchange to banks and other entities levies that are supposed to be remitted to beneficiary institutions at the official exchange rate (World Bank 2024a). While details on to finance road maintenance and rural electrification projects. the use of RBM foreign-exchange sales are not made public, a Import losses depleted the Price Stabilisation Fund in 2022, pre- large share went to finance purchases of fuel and fertilizer. venting it from fully compensating importers. Administrative pump Other sectors also benefit from implicit subsidies. Following prices are insufficient to cover escalating import and transporta- the suspension of the November 2023 energy price increase for tion costs,a and although suppliers have exported fuel to Malawi non-commercial customers, ESCOM has been unable to cover its on open credit, the increase in arrears has resulted in the severing costs, generating arrears of more than US$50 million. The ferti- of credit lines. lizer sector likewise benefits from quasi-fiscal activities through: Below-cost fuel prices are part of a wider trend of provid- (i) preferential access to foreign exchange, (ii) a budget alloca- ing implicit subsidies across sectors and products through tion from the AIP, and (iii) the government covering arrears and quasi-fiscal activities conducted outside the budget. The losses from SOEs and parastatals in the sector. a. Since January 2021, gasoline prices have been adjusted only five times, with the last adjustment in September 2023, while diesel prices have remained frozen for nine months. The supply of fuel has been temporarily reestablished through a new credit line, and efforts to bro- ker a bilateral fuel-supply arrangement are advancing, but deeper structural problems persist, as do the risk of renewed shortages. After repaying an initial loan of US$50 million, NOCMA has secured an additional US$50 million in financing through a revolving trade-financing facility with the Arab Bank 3 Since January 2021, petrol prices have been adjusted only five times, with the last change in September 2023, while diesel prices have remained frozen for nine months. 1. Recent Economic Developments 22 for Economic Development (BADEA) originally established in November 2022. New legislation passed in early December indicate a policy shift from open tendering to government-to-government (G2G) agreements that include longer repayment periods. In January 2025, the authorities announced the procurement of 40,000 MT of diesel and petroleum from Abu Dhabi via an agreement with Kenya, and Malawi is developing its own G2G arrangements with Gulf nations. However, the international experience has shown that G2G arrangements can lock the government into paying fixed prices significantly above the global price. Such agreements could also leave NOCMA as the sole importer and increase pressure on the RBM to provide foreign exchange from its limited re- serves. Moreover, Malawian legislation exempts these transactions from the PPDA Act, thereby evad- ing important oversight mechanisms. While the longer repayment periods under the new arrangement may provide some temporary relief from acute fuel shortages, the underlying structural problems will persist unless the government implements the necessary reforms to address price distortions and for- eign-exchange constraints. Three recently signed MDAs have accelerated the development of the mining sector. The govern- ment signed MDAs with Mkango Resources to develop the Songwe Hill rare earths project, with Lotus Resources to restart the Kayelekera uranium mine, and with Globe Metal & Mining for the Kanyika niobium project. These projects have considerable potential to boost exports and generate foreign exchange while creating local employment and procurement opportunities. However, their large en- ergy requirements could push total energy demand as much as 30 percent above current installed capacity. Continued progress in developing the 350 MW Mpatamanga hydropower plant could help ensure that these mines have sufficient energy to conclude the construction phase and initiate pro- duction (Box 1.2). The mining sector also faces challenges around negotiating a fair tax and royalty re- gime, funding the necessary supportive infrastructure, and developing environmental and social pro- tections and safeguards. These issues are detailed in the MEM’s Special Topic section, “Unlocking the Potential of the Mining Sector.” BOX 1.2  The Mpatamanga Hydropower Storage Project could have a transformative economic impact Investment in power generation is crucial for Malawi to create opportunities to trade surplus power through the Southern increase electricity access, build resilience to climate shocks, Africa Power Pool. Developed through a public-private partner- and accelerate economic growth. At 26 percent, Malawi cur- ship, constructing the MHSP will require a large investment of rently has one of the lowest rates of electricity access among about US$1.6 billion, or roughly 12 percent of Malawi’s 2023 nom- comparable countries, and boosting it will require substantially inal GDP, to complete construction (planned from 2025 – 2030). increasing generation capacity. In the past, power demand often The partnership arrangement, along with pledged support from outstripped supply, and over the medium term the country may Malawi’s development partners, will enable the project’s feasibil- face a significant power deficit that would hamper its economic ity despite the country’s macro-fiscal challenges. development. Moreover, Malawi’s lack of a reserve margin for The MHSP is expected to significantly impact Malawi’s econ- power generation makes it highly vulnerable to climate shocks. omy in several ways. During the construction phase, the project In 2022, Cyclone Ana caused major damage to the country’s will generate substantial investment, with multiplier effects on largest power plant, Kapichira (129.6 MW), resulting in 6 – 8 hours GDP and job creation. Once the MHSP is operational, it will have of daily loadshedding for over a year. At the start of 2025, power a transformative impact on multiple sectors, including trans- rationing resumed after technical challenges at the Kapichira portation, finance, agriculture, processed food and real estate. and Nkula B hydropower stations cut 84.8 MW (19.2 percent of The project will strengthen the trade balance, as a share of the total installed capacity) from the national grid. increased energy output will be exported, and a share will boost The Mpatamanga Hydropower Storage Project (MHSP) is a domestic production, facilitating non-energy exports. The MHSP strategic investment and would be one of the largest projects will also generate significant economic spillovers by boosting regional energy resilience and enhancing the Southern Africa in Malawi’s history. The project is set to generate over 1,500 giga- Power Pool’s efficiency, fostering economic integration and watt-hours annually, equivalent to 60 percent of Malawi’s current growth across member countries. electricity production. This project will boost the supply of clean, affordable energy, improving electricity access and foster private Between 2025 and 2050, the construction of the MHSP is pro- sector growth. The MHSP’s ability to supply and store power will jected to boost nominal GDP by US$1.6 billion, or about 13 greatly increase the reliability of the country’s power systems and percent of Malawi’s projected 2026 GDP. After construction, 1. Recent Economic Developments 23 the direct benefits from increased electricity production, com- (60 – 68 percent of 2026 expected GDP). Finally, the indirect ben- bined with the indirect impact on other sectors (excluding min- efits from supporting the development of the mining sector could ing), could add US$7.2 to US$8.0 billion to total economic output range from an additional US$11.4 billion to US$38 billion. FIGURE B1.2.1  The MHSP will have significant positive impacts across the Malawian economy a. Local Consumption b. Including Exports 600 3.0 500 3.0 500 2.5 400 2.5 400 2.0 2.0 US$, million US$, million 300 Percent Percent 300 1.5 1.5 200 200 1.0 1.0 100 0.5 100 0.5 0 0.0 0 0.0 2026 2025 2025 2028 2027 2029 2031 2030 2033 2032 2034 2036 2037 2035 2039 2038 2040 2042 2041 2044 2043 2045 2047 2046 2049 2048 2050 2050 2027 2026 2025 2025 2028 2030 2029 2032 2031 2033 2034 2035 2036 2038 2037 2040 2039 2041 2043 2042 2044 2045 2047 2046 2049 2048 2050 2050 c. With Four Mines Developed d. With Seven Mines Developed 1,000 7 3,000 20 6 800 2,500 16 5 2,000 US$, million 600 12 US$, million 4 Percent Percent 1,500 400 3 8 2 1,000 200 500 4 1 0 0 0 0 2026 2025 2028 2027 2030 2029 2031 2032 2033 2035 2034 2037 2036 2039 2038 2040 2041 2042 2044 2043 2046 2045 2048 2047 2049 2050 2050 2026 2025 2025 2028 2027 2029 2032 2030 2031 2033 2036 2034 2035 2037 2039 2038 2040 2041 2042 2043 2045 2044 2046 2047 2046 2049 2048 2048 2050 2049 2050 2050 Investment impact Electricity direct impact Electricity indirect impact Electricity export impact Mining added value GDP percent baseline Source: World Bank staff calculations based on MHSP impact study. Notes: a: Assumes 100 percent of the electricity produced by the MHSP is consumed domestically, with no additional impact from the development of mining activities. b: Assumes 50 percent of the produced electricity is exported, with no additional impact from the development of mining activities. c: Assumes 50 percent of the produced electricity is exported and includes the impact of mining activity from the Kayelekera, Kanyika, Songwe Hill, and Kasiya projects. d: Assumptions are the same as c but also include the Malingunde, Makanjira, and Kangankunde mining projects. The weak 2023/24 harvest has contributed to record levels of food insecurity A poor harvest following a protracted drought, high rates of food-price inflation, and diminished income opportunities have further strained access to staple foods, especially among poorer house- holds. Between October 2024 and March 2025, an estimated 5.7 million people, or 28 percent of the population, will face crisis-level food insecurity (Figure 1.10). Food insecurity remains chronic in Malawi, particularly dur- FIGURE 1.10  28 percent of the population faces crisis-level ing the October-March lean season, and has been particularly food insecurity severe over the past two years. In 2023, an estimated 4.4 mil- IPC 3 and above (number of people) lion people (22 percent of the population) faced acute food 10,000 insecurity, due in part to continued challenges around access 8,000 to affordable inputs, as well as the impact of Cyclone Freddy, Thousands 6,000 which disrupted agricultural production, particularly in the 4,000 southern region. 2,000 Results from the Rapid Feedback Monitoring System show 0 Phase 1 Phase 2 Phase 3 Phase 4 a severe deterioration in household welfare across south- ern Malawi. In August 2024, four in 10 families reported eat- 2023/24 2024/25 ing fewer than two meals per day, while three in 10 reported Source: World Bank staff based on IPC data. 1. Recent Economic Developments 24 eating fewer than two meals during the same period in the previous year. Assistance to households is largely seasonal and primarily comes from family members. In March 2024, shortly after the peak period for food insecurity, around 70 percent of households reported not receiving any form of sup- port, while 16 percent received cash, 10 percent received food, and 4 percent received both. For 70 per- cent of households, this assistance came from family members. FIGURE 1.11  The average household in Southern Malawi has FIGURE 1.12  The share of households in Southern Malawi reduced the number of daily meals compared eating fewer than two meals per day in the post-harvest to previous years months has reached its highest level since 2020 Average meals per day per household Proportion of households eating fewer than two meals per day 2.1 45 2.0 40 35 1.9 Meals Consumed 30 Percent 1.8 25 1.7 20 1.6 15 1.5 10 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 Survey Month Survey Month 2020 2021 2022 2023 2024 2020 2021 2022 2023 2024 Source: World Bank based on Rapid Feedback Monitoring Survey 2024. Source: World Bank based on Rapid Feedback Monitoring Survey 2024. Progress towards fiscal consolidation stalled in 2024 Lower-than-expected revenue collection and expenditure slippages during the first half of FY2024/25 widened the fiscal deficit, further undermining the fiscal consolidation envisaged under the ECF-supported reform program. During the first half of the fiscal year, from April – September 2024, the fiscal deficit reached MWK 950.9 billion (4 percent of GDP), 6 percent higher than the midyear tar- get of MWK 897.2 billion (3.8 percent of GDP). The domestic primary deficit, which excludes interest payments, expanded by 66.7 percent to MWK 234.8 billion (1 percent of GDP). By contrast, the ECF tar- get for September 2024 was a surplus of MWK 57 billion (0.2 percent of GDP). TABLE 1.1  FY2024/25 Midyear Budget Performance Billions, MWK Mid-Year Mid-Year Variance   Projection Outturn (percent) Total Revenue and Grants 2,222.5 1,726.9 -22.3 Domestic Revenue 1,638.3 1,503.5 -8.2 Tax Revenue 1,559.0 1,438.5 -7.7 Taxes on income, profits and capital gains 761.3 739.7 -2.8 Taxes on goods and services 643.5 563.4 -12.4 Taxes on international trade and transaction 153.2 135.0 -11.9 Other Revenue 79.3 65.0 -18.0 Grants 584.2 223.4 -61.8 1. Recent Economic Developments 25 Mid-Year Mid-Year Variance   Projection Outturn (percent) Expenditure 3,119.7 2,677.8 -14.2 Recurrent Expenses 2,234.3 2,239.0 0.2 Public Debt Interest 647.0 644.3 -0.4 Use of Goods and Services 629.7 544.1 -13.6 Grants 218.2 193.8 -11.2 Social Benefits 185.8 172.6 -7.1 Other expenses 31.2 31.6 1.0 Deficit -897.2 -950.9 6.0 Domestic Primary Balance -140.9 -234.8 66.7 Total Financing 897.2 950.9 6.0 Foreign Financing (net) 75.0 42.8 -43.0 Domestic Borrowing (Net) 822.2 908.2 10.5 Source: World Bank staff calculations based on mid-year budget. Note: Domestic primary balance is calculated by subtracting recurrent expenditures (except interest payment) and domestically financed development expenditures from tax and non-tax revenues. Revenue collection fell far short of the government’s FY2024/25 target, more than offsetting the re- duction in expenditures. As highlighted in the previous edition of the MEM (World Bank 2024b), the approved budget for FY2024/25 was based on very optimistic revenue assumptions. Specifically, the Treasury assumed revenues would be 32 percent higher than in the previous fiscal year due to large an- ticipated grant disbursements and improved tax collection. By midyear, however, revenues were un- derperforming across all major categories. At MWK 1,726.9 billion (7.3 percent of GDP), revenue was well below the approved target of MWK 2,222.5 billion (9.4 percent of GDP). The shortfall was largely due to a reduction in grant funding, which reached just MWK 360.8 billion (1.5 percent of GDP) versus a midyear target of MWK 584.2 billion (2.5 percent of GDP). Domestic revenue amounted to MWK1,438.5 billion (6.1 percent of GDP), 8.2 percent below the target of MWK 1,559.0 billion (6.4 percent of GDP). During the first half of FY2024/25, expenditures fell below targets across major categories except re- current spending, and especially wages. At MWK 2,677.8 billion, overall spending was 14.2 percent be- low the midyear target of MWK 3,229.7 billion, due in part to the backloading of expenditures. For ex- ample, fertilizer payments were shifted from the first half to the second half of the fiscal year. However, recurrent expenditures, in particular spending on wages and salaries, surpassed the midyear target by 26.1 percent and a further increase in public sector wages was announced in the mid-year budget. To accommodate the surge in the wage bill, the government reduced expenditures on domestically fi- nanced projects and social grants, as liquidity constraints in the domestic securities market hindered efforts to bridge the revenue shortfall through domestic borrowing (Box 1.3). Despite failing to reach its revenue targets during the first half of FY2024/25, the government has raised its revenue projections for the full fiscal year. The revenue projection has been revised upward from MWK4,552.2 billion (19.3 percent of GDP) to MWK 4,626.2 billion (19.6 percent of GDP). Meanwhile, the authorities modestly increased the expenditure target from MWK 5,988.8 billion (25.4 percent of GDP) to MWK 6,040.4 billion (25.6 percent of GDP). Reaching these targets would narrow the fiscal defi- cit from 6.1 percent to 6.0 percent of GDP. The tax revenue target remains broadly unchanged at 13.8 percent of GDP, but it is unclear how the higher overall revenue target will be achieved given the under- performance of revenues during the first half of the year, slowing economic activity, and the absence of significant new revenue measures. For context, tax revenue performance has averaged 12.2 percent of GDP over the past four years. Overly optimistic targets create risk of significant further slippages, 1. Recent Economic Developments 26 and Malawi is likely to again post one of the largest budget FIGURE 1.13  Rigid expenditures continue to limit the deficits in Sub-Saharan Africa, which could lead to the con- available fiscal space tinued accumulation of arrears and further monetary financ- Domestic revenue ing of the fiscal deficit. 100 Rigid expenditures, including interest on the public debt, 80 have significantly curtailed the government’s fiscal space. 60 Over the past four fiscal years, rigid budgetary expenditures Percent have consumed an average of 93 percent of domestic reve- 40 nue (Figure 1.13). These spending items entail institutional, legal, or contractual requirements or other constraints that 20 limit the ability of policymakers to alter the size and compo- sition of the budget, at least in the short term. Debt-service 0 2020/21 2021/22 2022/23 2023/24 2024/25 2024/25 obligations have increased rapidly, rising from 28 percent of Approved Revised domestic revenue in FY2020/21 to an estimated 43 percent in FY2024/25. As a result, rigid expenditures will continue to Compesation of employees Interest Pension and Gratuity Subventions limit the allocation of resources to social spending and pro- ductive investment. Source: World Bank staff calculations based on MoFEA data. BOX 1.3  Debt issuance is above target levels, yet financing gaps persist In the first half of FY2024/25 (April – September 2024), the increasing RBM holdings of government securities, particularly Treasury exceeded its debt-issuance targets, yet it may still fail treasury notes, raise concerns about the government’s capacity to cover the government’s financing needs. During this period, to generate adequate funding directly from the primary market. the Treasury issued two quarterly calendars aiming to raise about Unlike in FY2023/24, the Treasury did not publish an annual MWK 1.1 trillion, but it ultimately secured nearly MWK 1.4 tril- borrowing plan in FY2024/25 as required by Section 72 of the lion (Figure B1.3.1 and B1.3.2). Monthly results varied, with perfor- 2022 PFM Act. This plan would have outlined the government’s mance lagging early in the fiscal year before surging in August, gross financing needs — i.e., new borrowing requirements plus when it exceeded the monthly target by nearly 80 percent. Most debt maturities — along with financing sources and instruments. resources were raised from auction re-openings rather than from The World Bank estimates that Malawi’s gross financing needs initial auctions. Short-term securities were the main instrument, exceed MWK 3.5 trillion, suggesting that although borrowing is reflecting investors’ caution about longer-term prospects, and above target levels, it still falls short of covering the government’s the high exposure of the financial market to government debt overall financing requirements. This disparity partly explains increased the refinancing risks of government securities. The adverse fiscal outcomes such as the midyear budget deficit. FIGURE B1.3.1  Actual debt issuance significantly FIGURE B1.3.2  …with a sharp surge in July and August exceeded target levels… 4 IC 1,400 April 4 Actual 1,200 5 IC May 5 Actual 1,000 6 IC June 6 Actual MWK, billion 800 7 IC July 7 Actual 600 8 IC August 400 8 Actual 9 IC September 200 9 Actual 0 50 100 150 200 250 300 350 0 IC Actual MWK, billion TB 2y 3y 5y 7y 10y TB 2y 3y 5y 7y 10y Source: World Bank staff calculations based on MoFEA data. Source: World Bank staff calculations based on MoFEA data. 1. Recent Economic Developments 27 TABLE 1.2  Fiscal Accounts Percent of GDP 2024/25   2020/21 2021/22 2022/23 2023/24 Approved Revised Revenue 14.7 14.8 15.6 19.4 19.3 19.6 Domestic revenue 12.8 13.0 12.4 13.4 14.3 14.3 Taxes 12.1 12.2 11.9 12.4 13.8 13.8 On income, profits, and capital gains 5.6 5.5 5.6 6.1 6.7 6.7 On goods and services 5.5 5.7 5.1 5.1 5.5 5.5 On international trade and transactions 1.0 1.1 1.2 1.2 1.6 1.6 Other taxes 0.0 0.0 0.0 0.0 0.0 0.0 Grants 1.9 1.8 3.2 6.1 4.9 5.2 Bilateral 0.0 0.0 0.2 0.0 0.3 0.3 Multilateral 1.9 1.8 3.0 4.1 4.6 4.9 Other revenue 0.7 0.7 0.6 0.9 0.5 0.5 Property income 0.4 0.1 0.1 0.6 0.1 0.1 Sales of goods and services 0.3 0.6 0.4 0.3 0.3 0.3 Fines, penalties, and forfeitures 0.1 0.0 0.0 0.0 0.0 0.0 Expenditure 21.5 23.5 26.2 29.1 25.4 25.6 Expense 17.8 18.7 19.0 22.0 17.9 18.9 Compensation of employees 5.8 6.1 5.7 5.8 4.7 5.6 Use of goods and services 3.6 3.8 3.2 3.2 3.6 3.9 Generic goods and services 2.2 2.2 1.9 2.1 2.1 2.0 Interest 3.6 3.3 4.7 4.9 6.2 6.2 To nonresidents 0.2 0.2 0.3 0.3 0.3 0.3 To residents other than the general government 3.4 3.2 4.4 4.6 5.8 5.8 Grants 1.9 2.1 3.4 6.0 1.7 1.7 Social benefits 2.6 3.0 2.0 1.7 1.5 1.3 Fertilizer payments 1.3 1.9 1.1 0.6 0.6 0.5 Other expenses 0.3 0.4 0.1 0.5 0.1 0.1 Acquisition of Non-Financial Assets 3.7 4.8 7.2 7.1 7.5 6.7 Foreign financed 2.7 3.0 5.5 5.4 5.9 5.5 Domestically financed 1.0 1.8 1.7 1.7 1.6 1.2 Overall balance (accrual basis) -6.8 -8.7 -10.6 -9.6 -6.1 -6.0 Overall balance (cash basis) -7.7 -11.0 -8.3 -8.9 -6.1 -6.0 Discrepancy between cash and commitment balance -0.8 -2.3 2.3 0.7 0.0 0.0 Primary balance -3.2 -5.4 -5.9 -4.8 0.0 0.2 Net Incurrence of Liabilities 7.7 11.0 8.3 8.9 6.1 6.0 To foreign creditors (net) 1.0 2.6 1.9 1.1 0.6 0.8 To domestic creditors (net) 6.7 8.4 6.4 7.8 5.5 5.2 Sources: World Bank staff calculations based on MoFEA Fiscal data and MFMod GDP data. 1. Recent Economic Developments 28 Rising debt remains a concern amid protracted restructuring negotiations The public debt stock continues to grow, driven by large primary deficits, exchange-rate pressure, and unrecorded obligations. The rising debt stock reflects years of expansionary fiscal policy (Box 1.4), compounded by pressure on the exchange rate and the realization of contingent liabilities, fiscal risks, and arrears, due in part to SOE bailouts and weak commitment controls (Figure 1.14). These contin- gent liabilities continue to pose a significant risk to fiscal sustainability. Recent transactions to settle the debts of SOEs have increased Malawi’s debt stock and are a key driver of the gap between actual and projected debt levels. High-value legal settlements by the Attorney General’s office, particularly related to pharmaceutical and fertilizer contracts, have been securitized, directly adding to the debt stock. High-cost Treasury notes continue to dominate deficit financing. These notes are raised both from the banking and non-banking sectors (Figure 1.15). Their total value surged from MWK 154.9 billion (29.6 percent of total domestic debt) in early 2015 to over MWK 7,272.0 billion (79.1 percent) in October 2024, an increase of 49.5 percentage points. Treasury notes are traded at a significant discount due to the wide margin between their coupon rates and yields across tenors, which enhances their attractiveness to investors but comes at a steep cost to the government. By contrast, the issuance of Treasury bills has increased only modestly, constrained by the PFM Act’s limit on the outstanding stock to 25 percent of annual budgetary revenue. FIGURE 1.14  Exchange-rate pressures and contingent FIGURE 1.15  High-cost Treasury notes have primarily liabilities have boosted the debt financed the fiscal deficit Contributions to changes in public debt (% of GDP) (MWK billions) 28 10,000 24 9,000 20 8,000 16 7,000 12 6,000 Percent of GDP MWK, billion 8 5,000 4 4,000 0 3,000 −4 2,000 −8 1,000 −12 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 10/ 5 07 5 16 01/ 7 10/ 8 07 8 04 19 20 10/ 1 07 21 04 2 23 10/ 4 24 2 1 2 2 1 1 1 1 /20 20 20 20 20 /20 20 20 /20 /20 /20 20 20 /20 01/ 01/ Primary deficit Interest Growth Exchange rate 01/ 04 Other flows Residual Public debt change T Bills T Notes Other Source: Staff calculations based on the 2024 World Bank-IMF Debt Sustainability Analysis (forthcoming). Source: Staff calculations based on RBM data. After peaking at 91.3 percent of GDP in 2023, the public debt is projected to decline in 2024. According to the latest IMF-World Bank Debt Sustainability Analysis (IMF/World Bank 2025, forthcoming), the public debt is expected to moderate to 85.4 percent of GDP in 2024 (Figure 1.16). However, this estimate hinges on the successful implementation of fiscal consolidation measures and the resolution of risks associated with contingent liabilities. Historically, debt projections have been overly optimistic and have often deviated from actual outcomes (Figure 1.17). Unidentified debt, including contingent lia- bilities and other fiscal risks, remains a significant source of uncertainty and can undermine the accu- racy of debt forecasts. 1. Recent Economic Developments 29 FIGURE 1.16  The public debt stock is expected to decline FIGURE 1.17  …but previous projections have been overly in 2024... optimistic Public debt Public debt 100 100 Projection 80 80 Percent of GDP 60 Percent of GDP 60 40 40 20 20 0 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024e 2024 2023 2018 External Domestic Source: Joint Bank-Fund LIC DSA (forthcoming) 2025. Source: Joint Bank-Fund LIC DSA (forthcoming) 2025. Note: DSA vintages are based on rebased GDP. Public and publicly guaranteed debt remains in distress and is currently unsustainable, but the gov- ernment is attempting to reach an agreement on debt restructuring with its creditors. Achieving medium-term debt sustainability will hinge on the success of debt-restructuring negotiations with commercial and official bilateral creditors. The government has successfully restructured US$206 mil- lion (1.6 percent of GDP) with its largest official bilateral creditor, China, through a supplementary loan agreement. In addition, the Kuwait Fund for Arab Economic Development and the Saudi Fund for Development have agreed in principle to finalize restructuring negotiations, and India recently announced plans to conclude restructuring negotiations. However, negotiations with two main com- mercial creditors, Trade and Development Bank (TDB) and Afreximbank, have been underway since June 2022 and are advancing slowly. Achieving a mutually acceptable restructuring agreement with these creditors is crucial to restore debt sustainability in the medium term. Imports continue to exceed exports, and the current account deficit is expected to widen in 2024 The current account deficit narrowed in 2023 but is projected to widen again and reach 19 percent of GDP in 2024 amid worsening foreign-exchange shortages. Rising net exports and secondary income inflows bolstered the current account in 2023 (Figure 1.18),4 but Malawi’s imports are 2.5 times its exports. Persistently high fiscal expenditures amplify the demand for foreign goods and services, deepening the trade imbalance. This has led to substantial external liabilities, which are financed through official reserves, exacerbating the country’s acute foreign-exchange shortage. Large net errors and omissions in the BoP indicate a lack of transparency around the financing of the current account. Given insufficient export earnings to fund imports, Malawi has increasingly relied on foreign assets, external borrowing, and grants. Net errors and omissions in the BoP act as a balanc- ing item to ensure that the sum of the current, capital, and financial accounts equals zero. They cap- ture unrecorded transactions, including informal or illegal activities, and may also reflect inaccuracies in data collection and reporting. While some degree of errors and omissions is common, large values indicate that the official data do not offer full clarity on the financing sources for imports (Figure 1.19). Errors and omissions are gradually decreasing from their 2021 – 22 peak, largely due to increased sta- tistical capacity through greater collaboration between the National Statistical Office and the RBM. 4 Secondary income includes official development assistance and multilateral grants. 1. Recent Economic Developments 30 FIGURE 1.18  The current account deficit narrowed in 2023… FIGURE 1.19  …but its financing sources are not fully Current and capital accounts (% of GDP) explained Financial account components (% of GDP) 15 10 4 5 0 Percent of GDP Percent of GDP 0 −4 −5 −8 −10 −15 −12 −20 −16 2019 2020 2021 2022 2023 2024e −25 2019 2020 2021 2022 2023 2024e Direct investment Portfolio investment Derivatives Goods Services Primary income Secondary income Other investment Change in reserves Capital account Current and Capital account Net errors and omissions Current and Capital account Source: Staff estimates based on National Statistical Office data. Source: Staff estimates based on National Statistical Office data. Note: e= estimates. Note: e= estimates. Despite an improvement in the trade balance in 2023, Malawi’s external competitiveness is deteri- orating. The November 2023 devaluation of the kwacha, which aligned it more closely with the par- allel market rate, caused the REER to fall sharply. The devaluation temporarily enhanced the compet- itiveness of exporters and likely contributed to the narrowing of the current-account deficit in 2023. However, amid broader distortionary policies the REER has since resumed an upward trend, growing by 12.4 percent between December 2023 and October 2024 (Figure 1.20), partly reversing recent gains in external competitiveness. Preliminary estimates for 2024 point to a widening trade deficit driven by rising imports and underperforming exports (Figure 1.21). FIGURE 1.20  Export competitiveness is weakening as the FIGURE 1.21  … and the trade balance on course to widen REER appreciates… further REER index Merchandise trade 110 200 105 100 100 0 US$, million −100 95 01/2019=100 −200 90 −300 85 −400 80 −500 75 05/ 19 09 019 01/ 19 05 020 09 20 01/ 20 05 021 09 21 01/ 021 05 022 09 22 01/ 22 05 023 09 23 01/ 23 05 024 09 24 24 /20 20 /20 /20 /20 /20 /20 /20 /20 /20 /20 2 /2 2 2 2 2 2 01/ 70 Imports Exports Trade Balance 21 21 21 22 22 22 23 23 23 24 24 24 /20 /20 20 /20 /20 20 /20 /20 20 /20 /20 20 11/ 11/ 11/ 11/ 03 07 03 07 03 07 03 07 Source: World Bank staff calculations on NSO data. Source: IMF International Financial Statistics 2024. Note: Seasonally adjusted imports, exports, and trade balance. Fuel and other strategic goods continue to drive imports. In recent years, the most significant driv- ers of imports have been fuels, industrial inputs, fertilizers, and pharmaceuticals. Nevertheless, vehicle imports have increased dramatically since 2022, driving further demand for fuel (Figure 1.22). Reserve accumulation remains weak due to persistent foreign-exchange distortions and incomplete reforms. Despite the exchange rate reforms announced in the context of the November 2023 devalua- tion, the RBM has kept the official exchange rate fixed while key liberalization measures remain unim- plemented (Figure 1.23). The RBM has struggled to build buffers, with official reserve assets continuing 1. Recent Economic Developments 31 to decline to less than one month of import cover, while total reserves in the economy (i.e. including those held by authorized dealer banks) represent slightly more than 2 months of import cover. The spread between official and parallel market rates has widened to over 50 percent, creating substan- tial opportunities for foreign exchange traders to make significant profits, while diverting foreign ex- change from official markets. This is significantly higher than the median bureau rate, which has sta- bilized at a spread of around 11 percent against the official rate, raising concerns that the bureau rate is no longer a reasonable proxy for the parallel-market rate. FIGURE 1.22  Fuel and fertilizer make up a growing share of FIGURE 1.23  The exchange rate has remained stable, but total imports reserves have declined 3,500 2,400 1.0 3,000 2,000 0.8 Months of import cover 2,500 1,600 MWK per US$ 0.6 US$, million 2,000 1,200 0.4 1,500 800 1,000 400 0.2 500 0 0.0 221 2 3 22 2 2 23 3 3 3 24 4 4 4 0 02 02 02 02 02 02 02 02 20 20 20 20 7/2 9/2 3/2 7/2 9/2 3/2 7/2 9/2 2021 2022 2023 0112/ 3/ 121/ 121/ 06 04 010 06 04 010 06 04 010 0 0 Fuels Fertilizer Industrial inputs O icial TT Sell Median Cash Sell Pharmaceuticals Vehicles Other Gross O icial Reserves (right scale) Source: World Bank staff calculations on NSO data. Source: Reserve Bank of Malawi. A sharp decline in official remittances has deepened Malawi’s foreign-exchange challenges. In 2021, remittance inflows reached a record high of nearly US$300 million, but by late 2024 inflows had plum- meted to US$112.5 million. Meanwhile, outflows reached US$126.4 million, turning net remittances neg- ative for the first time, which exacerbated foreign-exchange shortages (Figure 1.22). High transaction fees for inbound remittances and a large premium between the official and parallel exchange rates dis- couraged inflows through official channels and intensified the foreign-exchange crisis. Recent regu- lations have been introduced to further strengthen foreign exchange controls beyond existing export proceed surrender requirements to encompass the mandatory conversion of foreign currency receipts. While these are intended to bolster official reserves, they could also have the unintended consequence of further increasing capital outflows, reducing liquidity in the formal foreign exchange market, and discouraging private sector investment. FIGURE 1.24  Remittances, once a key source of foreign exchange, have turned negative Inbound, outbound, and net remittances in Malawi 40 30 20 US$, million 10 0 −10 −20 −30 18 219 20 1101 21 2/2 21 22 23 2/2 9 019 7/2 9 8/ 9 1101 19 0112/ 19 2/2 0 4/ 0 7/2 0 8/ 0 1101 20 21//2 0 2/2 1 4/ 1 7/2 1 8/ 1 0112/ 21 4/ 2 7/2 2 8/ 2 1101 22 121 22 2/2 3 4/ 3 7/2 3 8/ 3 1101 23 121 23 2/ 4 4/ 4 7/2 4 8/ 4 24 02 2 02 2 02 2 02 02 2 02 02 2 2 01 01 2002 02 2 02 2 20 20 /20 /2200 20 20 /20 20 20 20 /20 /20 20 20 /20 20 /20 20 20 20 20 /20 4/2 121/ 06 03 05 09 06 03 05 09 06 03 05 09 06 03 05 09 06 03 05 09 06 03 05 09 10 0 0 0 Inward Remittances Outward Remittances Net Remittances Average Net Remittances Source: World Bank staff calculations based on RBM data. 1. Recent Economic Developments 32 Inflation is moderating but still high, as interest rates have remained stable Inflation began to moderate toward the end of 2024 but remained elevated, primarily driven by rising food and utility prices. Inflation exceeded 30 percent for much of 2024 but began to ease in September, and by November it had fallen to 27 percent. However, month-on-month price increases continue, with drought-re- lated spikes in food prices and escalating utility costs boosting inflation by 3 percentage points in November 2024 compared to the previous month (Figure 1.25). Meanwhile, non-food inflation remained relatively sta- ble throughout 2024 at about 22 percent. Inflationary pressures were exacerbated by the growth of the mon- ey supply, which was driven in part by the monetary financing of the fiscal deficit (Figure 1.26). Inflation has further eroded the purchasing power of households, worsening the decline in per capita income levels. FIGURE 1.25  Food, housing, and utility prices are driving FIGURE 1.26  …and the money supply is rapidly increasing inflation… Inflation and broad money (percent change year-on-year) Inflation and its components 60 35 30 50 25 40 20 Percent Percent 15 30 10 20 5 0 10 7 8 8 9 0 2211 2 3 018 0118 1 2 8 18 18 0119 7/2019 8/ 019 20 9 19 2019 210 07 2020 20 10 /2020 200 211 8/ 021 2 1 21 2 222 21/2022 2023 2 2023 23 1/ 0 3 2023 23 24 4 8 2024 /2024 4 24 022 7/202 02 2 02 2 2 02 7/202 1 8/202 /200 011/ 0 /20 011/ 0 /20 8/20 1211/20 /20 01312/220 0 20 20 0 0 20 0 200 0231//220 2 2 01312//22 1/2 /2 0 2 7/2 2 7/2 2 /2 2 2 / / 7/ / / 8/ 11/ / 8/ / 0211/ / 11/ / / 11/ 12 04 05 09 04 04 03 05 09 03 05 09 04 05 09 04 03 05 09 04 013 05 09 054 09 0 0 0 1 06 18 11/ 8 04 18 09 19 02 19 07 20 12/ 20 05 20 10/ 21 03 021 08 22 01/ 22 06 23 11/ 3 04 23 09 24 24 2 1 Food and Non-alcoholic beverages Housing & Utilities /20 /20 /20 20 /20 20 /20 /20 20 /20 20 /20 /20 /20 /20 20 2 01/ Transport Others CPI CPI Broad Money Source: World Bank staff calculations based on NSO data. Note: Contributions are based on the Statistics Netherlands (CBS) methodology. Source: World Bank staff calculations based on RBM and NSO data. The policy rate remained stable throughout the past 9 months and the RBM expects inflationary pressures to ease further in 2025. After hiking the policy rate by a cumulative 12 percentage points, from 14 percent in May 2022 to 26 percent in March 2024, the RBM held the rate stable through the rest of 2024 (Figure 1.27). The liquidity reserve ratio increased by 1.25 percent to 10 percent, and the real policy rate measured against headline inflation remained negative, though an alternative measure of the real policy rate, using non-food inflation as a benchmark, has been positive over the last year (Figure 1.28). Lending rates rose in line with FIGURE 1.27  The monetary policy rate has remained FIGURE 1.28  …while the real policy rate measured against unchanged since March 2024... headline inflation has remained negative 50 Real policy rate (using headline and non-food inflation) 15 40 10 5 30 Percent 0 Percent 20 −5 −10 10 −15 −20 0 06 18 11/ 18 04 18 09 19 02 019 07 20 12/ 20 05 20 10/ 21 03 021 08 22 01/ 22 06 23 11/ 23 04 23 09 24 24 /20 /20 20 /20 20 /20 /20 20 /20 20 /20 /20 /20 /20 20 2 /2 06 017 11/ 17 04 017 09 18 02 018 07 019 12/ 19 05 019 10/ 20 03 20 08 21 01/ 021 06 022 11/ 22 04 022 09 23 02 023 07 24 24 01/ /20 /20 /20 /20 /20 /20 /20 /20 /20 20 2 2 /2 /2 2 /2 2 2 /2 01/ Non food inflation Headline inflation Policy rate Base rate Average 91-day Tbill Max lending rate Source: World Bank staff calculations based on NSO data. Note: Two measures of the real policy rate are presented: relative to headline inflation Source: World Bank staff calculations based on NSO data. and to non-food inflation). 1. Recent Economic Developments 33 earlier policy-rate adjustments. At its November 2024 meeting, the Monetary Policy Committee kept the policy rate unchanged at 26 percent, citing a near-term outlook of decelerating inflation, though it also iden- tified the growth of the money supply as a key downside risk. However, monetary and fiscal policy have di- verged sharply in recent years, with monetary tightening coinciding with widening fiscal deficits (Box 1.4). BOX 1.4  Malawi’s recent fiscal and monetary policies have frequently diverged Coordinating monetary and fiscal policies is critical to mac- policy, while fiscal policy remains loose. This policy mix creates roeconomic stability, but in Malawi these policies often challenges, as recent interest-rate hikes have driven up yields sharply diverge. Since 2011, fiscal policy has generally been on Treasury securities, increasing debt-service costs that should expansive, albeit with exceptions in 2014 and 2016. Meanwhile, have been offset by higher primary fiscal balances. In addition, monetary policy has largely been tight, though it loosened when overly loose fiscal policy threatens debt sustainability, between 2017 and 2021. In recent years, the ongoing economic excessively high interest rates can undermine the stability of the crisis and its inflationary effects have led to tighter monetary financial sector. FIGURE B1.4.1  Malawi’s fiscal and monetary policies are uncoordinated Changes in fiscal and monetary policy stance 8 Tighter 6 4 Percentage points 2 0 −2 −4 Looser −6 −8 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Change in cyclically adjusted primary balance Change in monetary policy rate Sources: World Bank staff calculations based on MFMod, MoFEA and RBM data. Notes: In Malawi, the headline fiscal balance alone may not accurately reflect changes in fiscal policy. Therefore, this analysis uses the cyclically adjusted primary balance to infer the historical stance of fiscal policy. The cyclically adjusted primary balance, computed as the difference between cyclically adjusted revenues and cyclically adjusted expenditures, removes cyclical factors from the headline budget balance. Fiscal policy is tightening (loosening) if the annual change in the cyclically adjusted primary balance is positive (negative or zero). Interest rates on domestic securities have continued to rise in line with changes in the monetary policy rate. Rising inflation and significant demand for deficit financing led to a steepening of the domestic securities yield curve, as investors sought higher returns on longer-term securities to com- pensate for the erosion of purchasing power and higher risk. Since December 2021, yields on all types of Treasury securities have increased by over 10 percent. Treasury bills have also risen, though at a slower pace than Treasury notes. FIGURE 1.29  Domestic yields continued to edge upwards 40 1,400 35 1,200 30 1,000 25 Basis points 800 Percent 20 600 15 10 400 5 200 0 0 91 day 180 day 364 day 2 year 3 year 5 year 7 year 10 year 12/2021 11/2024 Yield Change (right scale) Source: World Bank staff calculations based on RBM data. 1. Recent Economic Developments 34 The banking sector remains profitable, but vulnerabilities are emerging Malawi’s banking sector has been highly profitable during the ongoing economic downturn. The average ROA for banks in Malawi rose from 5.0 percent in October 2023 to 5.9 percent in October 2024, far above the global average (0.5 – 1.5 percent) but in line with the December 2023 average for regional comparators such as Tanzania (4.5 percent) and Mozambique (4.7 percent). Malawian banks reported a 52.1 percent average ROE in October 2024, significantly higher than the global standard of 8 – 15 per- cent, the 10 percent average for South African banks recorded in June 2024, and the averages of 21.0 and 19.11 percent for banks in Tanzania and Mozambique, respectively, in December 2023. Banks in Malawi have been prioritizing safe investments, especially government securities, which has limited credit availability for the private sector. Between September 2023 and September 2024, the ratio of loans and advances to total assets fell by more than 17 percentage points to 24.4 percent, while the ratio of government debt to total assets stood at 51.4 percent. As a result, capital and liquid- ity positions have increased despite the country’s ongoing economic challenges, with banks adhering to stricter credit allocations. As of October 2024, the banking sector’s total capital ratio and Tier 1 cap- ital ratio stood at 20.0 percent and 17.8 percent, respectively, well above the regulatory minimums of 15.0 percent and 10.0 percent (Figure 1.30). Meanwhile, the liquidity coverage ratio strengthened from 51.5 percent in October 2023 to 53.1 percent in October 2024. Banks have increased their lending to the private sector, with only a small but rising share going to agriculture and manufacturing. From October 2023 to October 2024, credit to the private sector increased 20.0 percent. Nearly half of this lending is allocated to “Community, Social, and Personal Services” and “Wholesale and Retail Trade” (Figure 1.31) uses. Increasing demand in some segments is mainly attributable to the structure of the economy, the funding preferences of firms and individuals, the increasing use of digital offerings mainly targeting civil servants, the funding of vehicle fleets by the corporate sector, and the growth of the health sector and private educational institutions (Figure 1.31). The rising cost of goods and services may also have contributed significantly to the growth of credit to the private sector (Box 1.5). Amid this challenging environment, lending to these segments has been higher in Malawi than in neighboring Zambia. FIGURE 1.30  Banks in Malawi are highly profitable FIGURE 1.31  Personal loans and trade credit dominate 60 private-sector lending 50 Agriculture, forestry, fishing & hunting 40 Manufacturing Percent 30 Wholesale and retail trade 20 Community, social and personal services Other sectors 10 0 0 10 20 30 40 Percent 23 23 23 24 03 4 24 05 4 24 24 24 24 24 24 2 2 20 20 20 20 /20 /20 /20 /20 /20 /20 /20 /20 20 10/ 11/ 12/ 01/ 10/ 02 04 06 07 08 09 Average 2022 Average 2023 Tier 1 Capital ratio Liquidity coverage ratio ROE Average Q1–Q3 2024 Source: World Bank staff calculations based on RBM data. Source: World Bank staff calculation based on RBM data. Despite its high profits and apparent stability, RBM stress tests reveal that the banking sector is vul- nerable to major shocks, particularly due to credit concentration. While Malawi’s financial sector would be resilient to individual shocks, multiple simultaneous shocks could present a systemic threat. Additional risks stem from the banking sector’s concentrated borrowing patterns and high levels of individual client exposure, underscoring the importance of continued vigilance, risk management, and diversification. 1. Recent Economic Developments 35 BOX 1.5  Bank lending is on the rise, but credit standards are tightening The Malawian banking sector has experienced significant shifts in default rates, regulatory requirements, and concerns over asset lending trends. According to the RBM’s 2024 Bank Lending Survey, in quality. The tightening of credit standards was observed across the first half of 2024 demand for loans increased among households all economic agents, with banks indicating that they would further and among firms of all sizes. This surge in demand was driven by the stiffen credit standards and conditions for loan approval in the next improved quality of borrowers and by worsening economic and mar- six months. ket conditions, as firms required more credit to finance the same level Looking ahead, banks expect demand for loans to continue ris- of operations while households sought credit to mitigate the impact ing, driven by inflationary pressures and ongoing foreign-ex- of rising costs. Banks have started to expand their consumer lending change shortages. However, stronger demand is likely to be met portfolios, targeting civil servants in particular, as they are considered by a further tightening of credit standards, leading to a potential low-risk due to job security and direct salary deductions. increase in NPLs. Most banks expect NPLs to rise across all eco- Despite the increased demand for loans, banks maintained nomic agents, primarily due to the anticipated continued adverse stringent credit standards and conditions, citing increased macroeconomic conditions. Source: Reserve Bank of Malawi, Financial Stability Report. The share of non-performing loans (NPLs) in total loans continues to rise, highlighting the need to strengthen credit risk management in a difficult economic environment. The NPL ratio for the bank- ing sector rose from 6.7 percent in October 2023 to 9.0 percent in October 2024, exceeding the regula- tory threshold of 5.0 percent for over 12 months. Banks will need to enhance their credit risk manage- ment frameworks amid an unconducive business environment marked by high interest rates. Improved governance has supported the continued growth of savings and credit cooperatives and microfinance institutions. Driven by rising interest income, the subsector’s profits rose from MWK 4.7 billion in 2023 to MWK 7.3 billion in June 2024, an increase of 55.3 percent. As of June 2024, the capital adequacy ratio was 30.5 percent, far above the 10.0 percent regulatory minimum. Savings and credit cooperatives demonstrated satisfactory asset quality, with an NPL ratio of 3.8 percent, below the 5.0 per- cent regulatory benchmark. Deposit-taking microfinance institutions recorded core capital and total capital ratios of 20.8 percent and 24.9 percent, respectively, in June 2024. Although down from 23.6 per- cent and 28.1 percent in December 2023, the ratios exceeded the regulatory benchmarks of 10.0 percent and 15.0 percent. Asset quality improved, with the NPL ratio dropping from 4.5 percent in December 2023 to 4.0 percent in December 2024. Despite showing resilience in the first half of 2024, Malawi’s pension sector has faced significant decline in investment income. Investment income for the sector fell from MWK 589.0 billion in 2023 to MWK 246.0 billion in 2024, mainly due to a decline in unrealized gains amid a stock market down- turn. Key risks include rising payouts following the implementation of the 2023 Pension Act, height- ened credit risk due to increasing pension arrears, and asset concentration in a small group of listed companies (53.8 percent) and government securities (26.3 percent). Digital payment systems are expanding and becoming more efficient Individuals and firms are increasingly able to access financial services and conduct transactions through an evolving array of digital payment systems. Over 14 million people in Malawi use mo- bile-money services, the most widely used digital payment channel. The country’s major payment sys- tems infrastructure, MITASS, has remained stable and reliable, processing 3.7 million transactions worth MWK 57.1 trillion in 2024 alone. Retail digital payment services have seen significant growth, with a 9.9 percent increase in transaction volume and a 21.6 percent increase in transaction value. Malawi’s National Electronic Payments Gateway System, which aims to improve the efficiency and security of electronic payments while promoting financial inclusion, is expected to launch in the first half of 2025. The RBM has also implemented new measures to mitigate risks associated with digital payments, in- cluding robust fraud-mitigation solutions and public awareness campaigns. 1. Recent Economic Developments 36 The ongoing development of Malawi’s payment systems is part of a broader regional trend, with similar efforts underway in Zambia, Mozambique, and Tanzania. Tanzania, for example, has intro- duced the Tanzania Instant Payment System, an interoperable digital payment platform that handled over 235 million transactions in 2023. Tanzania has also further strengthened its payment systems in- frastructure with the establishment of the Tanzania Interbank Settlement System and the Tanzania Automated Clearing House. 37 1.3 MEDIUM-TERM ECONOMIC OUTLOOK Malawi’s economy is in a highly vulnerable position. While GDP growth for 2025 is currently project- ed to exceed 4 percent, supported by a stronger agricultural season and robust manufacturing out- put, persistent foreign-exchange shortages continue to pose serious challenges for the private sec- tor. Ongoing investments in commercialized agriculture, energy and the mining sector are expected to boost economic activity and increase exports, but their benefits will take years to materialize and will require sustained macroeconomic stabilization. The medium-term outlook is subject to signifi- cant downside risks, including increasingly frequent climate-related disasters, expected investments not materializing, and the continued slow pace of macroeconomic adjustment and reform, especial- ly in a pre-election context. One year after the start of the government's ECF-supported macroeconomic reform program, ef- forts to address the rising fiscal and external imbalances have stalled. The implementation of the FY2024/25 budget is showing significant slippages, with revenue in particular performing far below ex- pectations. The midyear budget amendment includes some limited revenue measures, but these are unlikely to have a large impact on the fiscal balance while new wage increases will put further pressure on expenditures. Meanwhile, debt vulnerabilities are likely to persist amid the slow momentum of debt restructuring, as interest payments and other statutory expenditures will continue to crowd out pro- ductive investment. Moreover, the implementation of key PFM reforms, including the integration of human resource management into IFMIS, is progressing slowly. Containing expenditures and ensuring that the FY2025/26 budget returns to the fiscal consolidation path agreed to in 2023 under the govern- ment’s economic reform program supported by the ECF will be vital to shore up macro-fiscal stability. Acute foreign exchange shortages are likely to persist into 2025, though the tobacco harvest should ease pressures temporarily. The official exchange rate, a key policy lever to enable to accumulation of reserves and increase the external competitiveness of the economy, has remained effectively fixed since early 2024, while the gap with the parallel-market rate has steadily increased. In the absence of new sources of foreign exchange, shortages of critical imports will likely persist, and most current ac- count transactions will continue to use the parallel-market rate. Sustainably addressing this will re- quire increased exchange rate flexibility and moving towards cost-reflective pricing of fuel and energy. The country faces a challenging lean season, entering the new year with few buffers and record lev- els of food insecurity. Food stocks have been largely depleted following last year’s El Niño-induced drought, and prices for maize and other food staples are significantly higher than in recent years. A La Niña phenomenon is projected for the current year, which may entail greater rainfall and contribute to a strong harvest though it could also result in an increased liklihood of tropic cyclones. At the start of the planting season, fertilizer remains in short supply, including AIP-supported fertilizer, as the fuel sector has been prioritized for foreign-exchange allocation. Limited fertilizer access is likely to adverse- ly affect agricultural output in the coming year. 1. Recent Economic Developments 38 Rising food prices due to weak domestic production, coupled with the continued growth of the money supply, will likely keep inflation at or above 25 percent in 2025. Further increases in energy and other utility prices could exacerbate inflation. Depending on inflation developments, interest rates may also remain elevated further pressuring the interest rate bill. Additional monetary financing of the fiscal deficit poses an especially serious risk. Fiscal pressures will likely intensify in the run up to the 2025 elections. Over the past three dec- ades, fiscal deficits have increased dramatically in election years (Figure 1.32). Given Malawi’s exist- ing vulnerabilities, a loss of budget discipline could lead to a fiscal crisis and/or drive a renewed surge in inflation. High-interest commercial debt contracted during the 2020 election cycles is a major contributor to Malawi’s unsustainable debt burden, and any new borrowing must be consist- ent with the PFM and PPDA Acts, active IMF- and World Bank-supported programs, and Malawi’s Debt Management Strategy. FIGURE 1.32  Since the 1990s, deficits during election years have been 74 percent higher than during the preceding four years Fiscal balance 2 0 −2 −4 Percent −6 −8 −10 −12 199 5 96 199 7 199 8 199 9 20 0 20 1 20 2 20 3 20 4 20 5 20 6 20 07 20 08 20 9 /10 20 1 20 2 13 20 4 20 5 16 20 7 18 20 9 20 20 1 20 2 24 20 3 (R 24 d) /0 1 /2 9 1 0 1 2 /0 /2 /0 1 9 /0 1 9 /0 1 7/9 /0 0 10/ 16/ 11/ 12/ 13/ 14/ 18/ 17/ 15/ ise 6/ / 21/ /25 23/ 01/ 19/ 4/ 8/ 5/ / 9/ 20 00 09 06 22 02 03 04 08 07 05 199 20 199 20 20 20 ev 20 Fiscal balance Election years 20 Source: World Bank staff calculation based on MoFEA data. In prioritizing the reforms needed to stabilize and grow the economy, Malawi can draw on lessons from neighboring Zambia, which is successfully recovering after a severe macroeconomic crisis. Zambia defaulted on its external debt in 2020 (Figure 1.33). While it still faces many challenges, the economy is stable and FIGURE 1.33  Zambia’s recovery holds lessons for Malawi growing, even in the face of a severe El Niño-induced drought GDP growth per capita in early 2024. The adjustment process was difficult and required 4 a sustained commitment to ambitious reforms across all lev- els of government. Fiscal measures focused on deficit reduc- 2 tion, improved debt management, increased revenue mobiliza- 0 Percent tion, and enhanced service delivery. Reforms designed to bring the energy sector closer to cost recovery addressed longstand- −2 ing fiscal risks. To mitigate the impact of fiscal consolidation Zambia defaults on −4 external debt and initiates on poor households, social transfers were scaled up with sub- substantial reforms stantial support from development partners. The authorities −6 also implemented significant governance reforms in the ex- 15 16 17 18 19 20 21 22 23 4e f 25 20 20 20 20 20 20 20 20 2 20 tractive industries, enabling Zambia to benefit from the cur- 20 20 rent boom in ETM demand. Finally, the government pursued Zambia Malawi far-reaching reforms to the business environment to attract Source: World Bank staff calculation based on World Development Indicators data. FDI and boost exports. Notes: e= estimate, f=forecast. 1. Recent Economic Developments 39 Key policy priorities include macroeconomic stability, foreign investment, and resilience to shocks This 20th edition of the Malawi Economic Monitor finds that the cost of sustained inaction on mac- roeconomic imbalances is rising. Depleted buffers and persistent fiscal and current account deficits leave Malawi susceptible to external shocks and other crises. Continued delays increase the risks of fur- ther deterioration, while implementing announced stabilization and adjustment reforms could enable the economy to accelerate significantly over the next five years as planned investments in the energy, mining, and agriculture sectors materialize. These investments would lead to the direct and indirect creation of numerous jobs, boost exports and revenues, and catalyze further FDI. Realizing Malawi’s significant medium-term growth potential, including the opportunities pre- sented by its mineral wealth, will require urgent reforms in three areas: i) Restoring macroeconomic stability: Planned macro-fiscal reforms must be sustained and fully implemented, with a focus renewed on fiscal consolidation, finalizing the external debt restruc- turing process, containing the growth of domestic borrowing, boosting reserve accumulation by implementing announced exchange-rate reforms, and controlling inflation by limiting the growth of the money supply and ending monetary financing of the fiscal deficit. ii) Creating conditions for increased private sector investment and exports: Increasing investment is critical for the sustainable growth of the economy. In a context of limited fiscal resources, the suc- cess of the ATM Strategy will be determined by whether the private sector is willing to invest and whether more is done to ensure that the limited public funds are used well. Key measures include encouraging much-needed private investment by eliminating implicit fuel and energy subsidies to reduce the risk of shortages, developing a transparent mining revenue management system that supports long-term prosperity, and phasing out foreign-exchange surrender requirements. iii) Building resilience and protecting the poor: With domestic food production continuing to fall far short of consumption, it will be important to advance the process of reforming the AIP and repur- posing agriculture expenditure towards activities that increase productivity and resilience. These measures will also be critical to strengthen disaster preparedness and should be augmented by the implementation of the DRM Act, including the establishment of a DRM Fund, and the finali- zation and implementation of the Energy Compact. 1. Recent Economic Developments 40 TABLE 1.3  Priority Policy Areas and Key Actions 1. Restoring macroeconomic stability Tighten expenditure controls and implement substantive tax policy and adminis- Resume fiscal consolidation Short tration reforms to resume fiscal consolidation. Conclude external debt restructuring to sustainably deliver debt relief and con- Finalize debt restructuring Medium tain domestic borrowing. Fully implement the exchange-rate reforms announced in the November 2023 Bolster foreign-exchange reserves Short RBM circular and continue reducing foreign-exchange sales to the market. Control inflation Limit the growth of the money supply and halt monetary financing of the deficit. Medium Creating conditions 2.  for increased investment and exports Eliminate implicit fuel Implement the existing formula to ensure cost-reflective fuel and energy prices Short and energy subsidies and reduce MERA, NOCMA and ESCOM arrears. Develop transparent mining Develop suitable mining revenue management arrangements to (i) ensure high Medium revenue management systems savings and investment and (ii) manage pressures for consumption spending. Phase out foreign-exchange Set credible targets to phase out surrender and conversion requirements, start- surrender and conversion ing with the 30 percent foreign-exchange surrender requirement on exports Short requirements earnings and holdings, especially in priority sectors. Building resilience 3.  and protecting the poor Reform AIP subsidies to support Continue reforming the AIP fertilizer subsidy to reduce fiscal burden, improve tar- more resilient and productive geting and rebalance agricultural spending towards sustainable farming prac- Medium agriculture tices and irrigation. Implement policies to build resilience, including the Disaster Risk Management Prepare for the next disaster Medium Act, and establish a disaster fund. Finalize and implement Energy Compact to enable investments that would signif- Expand energy access Medium icantly increase energy access by 2030. Initiate Strengthen Sustain 1. Recent Economic Developments 41 TABLE 1.4  Key Macroeconomic and Financial Indicators   2024 2025   2020 2021 2022 2023 est. proj. National Accounts and Prices GDP at constant market prices (% change) 0.8 2.8 0.9 1.6 1.8 4.2 Agriculture 3.4 5.2 -1.0 0.6 -2.0 5.0 Industry 1.2 1.9 0.9 1.6 2.1 3.3 Services -0.5 2 1.8 2.1 3.3 4.2 Consumer prices (annual average) 8.6 9.3 20.9 28.7 33.6 27.3 Central Government (% of GDP) Revenue and grants 14.6 15.1 16.2 16.8 16.6 16.7 Tax revenue 12 12.4 12.2 12.1 12.2 12.2 Grants 2 1.8 3.4 3.7 3.5 3.5 Expenditure 22.2 23.4 26.5 27.1 24.4 26.6 Overall balance (excl. grants) -9.5 -10.2 -13.6 -13.9 -11.3 -13.4 Overall balance (incl. grants) -7.5 -8.4 -10.3 -10.2 -7.7 -9.9 Foreign financing 0.9 1 1.4 0.2 0.6 0.7 Domestic financing 6.6 7.4 8.8 7.7 7.1 9.2 Money and Credit (average) Broad money (% change) 13.9 23.6 34.3 34.0 45.5 45.5 Credit to the private sector (% change) 16.2 15.3 15.1 14.8 14.9 14.9 External Sector (US$ millions) Exports (goods and services) 1,314.0 1,591.1 1,490.1 1,562.9 1,418.5 1,792.1 Imports (goods and services) 3,376.4 3,770.4 3,707.1 3,944.9 3,584.5 4,090.3 Gross official reserves 565 79 120 201 133.1 -- (months of imports) 2.7 0.3 0.5 0.7 0.5 -- Current account (% of GDP) -13.6 -15.2 -17.3 -16.1 -18.7 -16.5 Exchange rate (MWK/US$ average) 749.5 805.9 949.039 1161.094 1738.34 -- Debt Stock External debt (public sector, % of GDP) 26.7. 38.2 34.1 48.5 47.2 46.7 Domestic public debt (percentage of GDP) 16.3 19.3 42.6 42.8 38.2 36.5 Total public debt (percentage of GDP) 43 57.5 76.7 91.3 85.4 83.2 Poverty Poverty rate (US$2.15 per person per day) 70.6 70.6 71.3 71.7 72 71.3 Poverty rate (US$3.65 per person per day) 89.4 89.4 89.5 89.7 89.8 89.5 Poverty rate (US$6.85 per person per day) 97.4 97.4 97.5 97.5 97.5 97.5 Sources: World Bank staff calculations based on 2024 DSA, MFMod, MoFEA, RBM and IMF data. Notes: Fiscal data are presented on a calendar-year basis. Poverty rates are calculated in 2017 purchasing-power-parity terms. Forecast for 2025 from October 2024 World Bank Malawi Macro-Poverty Outlook. 2 UNLOCKING THE POTENTIAL OF MALAWI’S MINING SECTOR AMID THE GLOBAL ENERGY TRANSITION: GROW, PROTECT, AND BENEFIT 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 43 The global shift toward renewable energy and electrification is increasingly mineral-intensive. By developing its mining sector, Malawi can attract foreign investment, create jobs, and stimulate eco- nomic growth, while also positioning itself as a crucial player in the green energy supply chain. Drawing on the World Bank’s forthcoming "Mining Sector Diagnostic", this Special Topic section explores how mining projects already in the pipeline could impact and significantly improve Malawi’s medium-term economic trajectory. It also identifies the main challenges that hinder sectoral growth and presents prioritized recommendations for the short and medium term. Malawi’s Mineral Endowment Southern Africa holds a diverse range of valuable mineral deposits, including many resources crit- ical for the global energy transition. For example, the region has deposits of chrome (35.1 percent of world reserves and 38.6 percent of annual production), manganese (74 percent of global resources, 32.1 percent of reserves, and 29 percent of production), and platinum (91 percent of world reserves and 72 percent of production). It also produces 34 percent of the world’s gem-quality diamonds, valued at US$30.6 billion (Guj et al. 2025, forthcoming). With demand for ETMs continuing to rise, Malawi’s mining sector has attracted increased interest both from researchers and international investors. Since 2010, regional geological programs, sup- ported by the government and development partners, have studied Malawi’s key rock formations, includ- ing Precambrian basement rocks, remnants of the Paleozoic Karoo system, Mesozoic igneous intru- sions, and Cenozoic fluvial complexes. These studies have revealed several economically viable mineral deposits, along with new exploration targets and areas with high potential for mining development. As a result, Malawi is increasingly recognized as a mineral-rich country with a unique mix of resources. Notable minerals include graphite, titanium, uranium, niobium, tantalum, and heavy sands. The coun- try also has significant industrial minerals like rock aggregates and limestone, along with undeveloped deposits of gold, and copper (Figure 2.1). Malawi holds an estimated 2 percent of the world’s rare earth elements, and a major rutile deposit at Kasiya is currently under advanced exploration. Moreover, its average uranium concentration per square kilometer is three times the global average. FIGURE 2.1  Most mineral deposits in Malawi are still at the greenfield stage 6 5 Number of sites 4 3 2 1 0 tile ite er um nd e s ds ld e um re e ite el ium te e rth s ium lite ne nd n hit ton rit ck Go ha pp no n ux an Sto mo Ea Ru icu nd ps Py sto Sa Sa ap ob an Ni p es Co Ba nti Iro Gy os Dia ru re rm ion Gr Ni Ur m Lim ss ral tro Ra Co Ph Ge Ve Gla ne s /S en Mi Dim e zit vy na ea Mo dH an ium an Greenfield Deposit Large scale mine Tit Source: International Trade Administration database 2024. The Mineral Intensity of the Global Energy Transition The global shift towards net-zero emissions will be highly mineral-intensive, and Malawi possesses abundant mineral resources crucial for this transition. As governments around the world move to decarbonize their energy systems, the demand for key minerals used in renewable energy technologies 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 44 and electric vehicles is expected to rise sharply (Figure 2.2). Minerals like lithium, cobalt, nickel, graph- ite, copper, rare earth elements, and manganese are essential for technologies such as solar panels, wind turbines, and batteries, while terbium and dysprosium are necessary to make high-temperature magnets for electric vehicles and aerospace applications, and copper is critical for electrical wiring in renewable energy infrastructure (Figure 2.3). FIGURE 2.2  Metals intensity of clean energy technologies FIGURE 2.3  Mineral demand for clean energy technologies and conventional fossil fuel technologies is expected to grow rapidly a. Transport a. Growth to 2040 by sector 50 Hydrogen Electric car 6x Electricity networks 40 EVs and battery Conventional car storage Other low-carbon 0 20 40 60 80 100 120 140 160 180 200 220 30 Tons, million 4x power generation Kg/vehicle Wind b. Power generation 20 Solar PV O shore wind 10 Onshore wind 0 2020 SDS Net-zero by 2050 Solar PV b. Growth of selected minerals in the SDS, 2040 relative to 2020 Nuclear 50 Coal 40 Natural gas Index, 2020 = 1 30 0 2 4 6 8 10 12 14 16 20 Kg/MW, thousand Copper Lithium Nickel 10 Manganese Cobalt Graphite 0 Chromium Molybdenum Zinc Lithium Graphite Cobalt Nickel Rare earths Rare earths Silicon Others Source: International Energy Agency 2021. Source: International Energy Agency 2021. Notes: SDS=Sustainable Development Scenario, indicating what would be required in a Notes: Steel and aluminum not included. trajectory consistent with meeting the Paris Agreement goals. Current Status of Malawi’s Mining Sector Despite the government’s continued efforts, the mining and quarrying sector is still nascent, rep- resenting just 0.7 percent of GDP in 2023. In recent years, the sector has seen some growth in small scale mining, with its annual contribution to government revenue increasing from 2.6 percent in 2022 to 3.5 percent in 2023.5 The government expects the sector to continue expanding and reach 10 per- cent of GDP by 2063, in line with its historical performance in 2013, when the country’s only large-scale mining project in Kayelekera was active. Currently, Malawi’s mines produce small quantities of coal, limestone for cement manufacturing, iron ore, rock aggregates, dimension stone, precious metals, gemstones, and semi-precious stones. The min- erals that typically justify large-scale industrial operations are presently mined at a small scale. In 2023/24, total coal production was 64,251 tons, limestone for cement manufacturing totaled 216,397 tons, gemstones 5 This increase was in response to an increase in demand for rock aggregates, limestone, iron ore, and gemstones. The govern- ment’s commitment to continue implementing ongoing construction projects in the country during the 2023/24 fiscal year increased the demand for the construction industry’s products. 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 45 and semi-precious stones reached 793 tons, and rock aggregate production was 318,729 tons — a 37 percent decline from 2022. Dimension stone exports totaled 2,241 tons, up almost 10 percent from the previous year, but exports of calcitic lime products fell by 53.4 percent, from 1,025 tons to 478 tons, or just US$87,000 in nominal terms. Due to the closure of the Kayerekera mine, uranium production and exports have been suspended since 2012. Overall, Malawi generates very little foreign exchange from its mineral exports. Despite the country’s substantial ETM resources, the growth of Malawi’s industrial mining sector has been slow. Globally, the average lead time from discovery to production for mining projects is 18 years (S&P Global Market Intelligence 2023). This timeline includes geoscientific works, detailed exploration, feasibility assessments, environmental and social impact assessments, and the negotiation of MDAs to extract and export mining products. However, Malawi’s lead time currently averages 27 years. The longest delay occurs during the MDA negotiation and signing stage, which one project took 12 years to complete. While the FIGURE 2.4  Mineral deposits are distributed across government and project sponsors must agree on the terms of Malawi’s territory the investment and return, prolonged negotiations risk delay- The geographical location of Malawi’s pipeline projects. ing exports and missing the current market cycle. For exam- Mining projects ple, current legislation provides for the government to elect Main cities Railways an undetermined level of free state participation, which ulti- mately creates a need for negotiation where this is elected. Kayelkera Karonga uranium Malawi’s legal, regulatory, and institutional framework and their capacity must be upgraded and modernized to effectively manage and monitor large-scale mining oper- ations. The Mines and Minerals Act and related regulations have been amended six times since 1981 to strengthen legal oversight of the extractive industry, while laws such as the Mzuzu 2017 Environment Management Act and the 2022 Land Act aim to protect people and the environment. However, there were no large-scale mining operations in the country when most of these laws were drafted. While the government has recently established the Mining and Minerals Regulatory Kanyika niobium Authority (MMRA) to oversee the sector, both new and exist- ing government entities are underfunded, and their capabil- Kasungu ities are limited. Makanjira Kasiya ilmenite If managed effectively, the expansion of Malawi’s mining rutile sector could catalyze economic and social development. Lilongwe Eight ETM projects in the pipeline have been evaluated as po- Malingunde tentially economically viable: Kayelekera Uranium, Kasiya graphite Mangochi Rutile, Kankangunde Rare Earth Elements, Kanyika Niobium, Songwe Hills Rare Earth Elements, Makanjira Heavy Sands, Balaka and Malingunde Graphite (Figure 2.4). In addition to diversify- Kangankunde ing exports and generating much-needed fiscal revenue, these rare earths projects could represent important “anchor investments” to attract additional foreign investment in mining and spur the Songwe development of infrastructure that would benefit local com- Blantyre rare earths munities and bolster the productivity of other economic sec- tors (World Bank 2023). None of these projects are currently operational. The Kayelekera mine started operating in 2009 but was shuttered in 2014. However, the project has signed an MDA and is in the process of applying for permits to reopen. The Kanyika Source: World Bank 2023. 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 46 Niobium and Songwe Hills Rare Earths projects have also recently signed MDAs and are advancing to the permitting stage. The project sponsors of Makanjira and Kankangunde have indicated that they plan to pursue mining operations without the MDAs. All remaining projects are at advanced explora- tion stage and are finalizing their feasibility studies. Given adequate financing, most of these depos- its could be developed into mechanized, large-scale operations. Financial backers often require min- ing companies to have offtakers in place, and offtakers in turn frequently require, as a pre-condition, MDAs with stabilization clauses. The production timelines for all eight projects are subject to uncertainty. According to the latest World Bank projections, all eight sites could be in production by 2031 both in the best-case and base- line scenarios (Figure 2.5 and Table 2.1). In the baseline scenario, production could begin in 2026, most likely from the resumption of Kayelekera. In the best-case scenario, production could start as early as 2025, and all eight sights could be operational by 2029. These projections assume no further delays beyond the active exploration, engineering, and construction phases. Other risks include price vola- tility, technical complexity, and infrastructure-related challenges (Table 2.1). FIGURE 2.5  Lead times for major pipeline projects, baseline and best-case scenarios a. Best Case Scenario Public Domain Schedules (High Level Components) 2024 2025 2026 2027 2028 2029 2030 2031 Kasiya Project Malingunde Project Songwe Hill Project Kangankunde Project Kanyika Project Kayelekera Project Livingstonia Project Makanjira Project b. Base Case Scenario Schedules (High Level Components) 2024 2025 2026 2027 2028 2029 2030 2031 Kasiya Project Malingunde Project Songwe Hill Project Kangankunde Project Kanyika Project Kayelekera Project Livingstonia Project Makanjira Project Engineering Funding & Approval FID Execution Power Source: World Bank staff projections based on publicly available data and interview with officials. Notes: The status and anticipated schedules of major mining projects until production. FID=Final Investment Decision. 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 47 TABLE 2.1  Risks heavily influence the pace of project operationalization Financial Securing Complexity (10%) Overall Schedule Transport (25%) Relations (10%) of Funds (25%) Price Volatility Government Power and Technical Current Project Proposed Impact (30%) Production Start Production Start Project Ownership Stage Product Date (Best Case) Date (Base Case) Pre-Feasibility Study Sovereign (PFS) Complete, Rutile, Kasiya 24/11/2027 3 2 3 3 3 2.9 14/03/2029 Metals Ltd. PFS Optimization Graphite ongoing. Environmental Sovereign and social studies Malingunde Graphite 30/03/2028 3 3 3 4 2 3 09/10/2030 Metals Ltd. complete, moving towards PFS Mkango DFS Complete, Rare Songwe Hill Resources Awaiting final Earth 02/09/2027 5 3 3 5 4 4.35 24/05/2029 Ltd. permits Elements Mkango Pre-Feasibility Study Rare Kangankunde Resources (PFS) Complete, Earth 19/01/2028 5 2 2 3 4 3.65 18/06/2031 Ltd. Awaiting DFS Elements Globe DFS Complete, Niobium, Kanyika Metals & awaiting MDA and 05/02/2026 3 3 3 4 3 3.25 18/07/2029 Tantalum Mining final permits Lotus Definitive Feasibility Kayelekera Resources Study (DFS) Uranium 11/09/2025 4 3 3 4 4 3.8 05/03/2026 Ltd. Complete Globe Early Exploration Livingstonia Metals & Uranium 28/03/2029 4 3 3 4 5 4.05 21/05/2031 Stage Mining MAWEI Initial Exploration Mineral Makanjira 04/01/2029 2 3 3 4 5 3.45 25/09/2030 Mining Stage Sands Source: World Bank staff projections based on publicly available information 2024. Notes: The status and anticipated schedules of major mining projects and their major controlling factors until production. High score= high risk; low score= low risk TABLE 2.2  World Bank Projections for Pipeline Mining Projects Operationalization year 2025 – 2040 export earnings (US$ billions) Project Baseline Best case Baseline Best case Kasiya 2029 2027 5.63 6.73 Kanyika 2029 2026 2.26 3.02 Kayelekera 2026 2025 1.69 1.75 Malingunde 2030 2028 0.55 0.69 Kagankunde 2031 2028 16.15 26.65 Songwe hill 2029 2027 2.60 3.09 Makanjira 2030 2029 0.87 1.00 Total export earnings 29.76 42.92 Source: World Bank staff projections based on publicly available information 2024. Note: The estimates in this table were derived using publicly available production forecasts from project studies, combined with key physical parameters such as recovery rates and average grades. A most likely development schedule for each project was constructed, incorporating expert input on typical project development timelines and considering infrastructure constraints in Malawi. Commodity prices were sourced from the "Malawi Mining Sector Pipeline Rapid Assessment" report. The Livingstonia project has been omitted given its early stage of development and the high level of uncertainty about production potential. During the production phase, mining exports could increase the available fiscal space, generate sig- nificant foreign exchange, and ease debt challenges, but this process will take 5 – 10 years. Under the World Bank’s baseline scenario, the mining sector grows gradually from 2026 to 2033 and then rap- idly starting in 2034, as all seven projects come online and move toward their full capacity (Figure 2.6). 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 48 Between 2026 to 2040, the mining sector could generate a total of US$30 billion in exports, with annual exports reaching US$3 billion by 2034 and remaining broadly stable over the life of mines. Under the best-case scenario, mining exports would total US$43 billion over 2025 – 2040, 43 percent above the base- line. Decisions made now will determine whether Malawi’s mining sector achieves its full potential. All mining export revenues are subject to various taxes, and the sector is obliged to finance certain pub- lic services. These projections are preliminary and further work is ongoing as part of an ETM Roadmap developed jointly between the government and the World Bank Group to evaluate the country’s infra- structure and identify industrial diversification opportunities that could be supported domestically or through coordinated investments with Malawi’s neighbors.6 FIGURE 2.6  If it materializes, the Kangankunde project is expected to have the greatest impact on exports Projected Export Earnings a. Base Case Scenario b. Best Case Scenario 5 5 4 4 3 3 US$, billion US$, billion 2 2 1 1 0 0 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Makanjira Songwe Kangankunde Malingunde Kayelekera Kanyika Kasiya Less Certainty More Certainty Source: World Bank staff projections based on publicly available information 2024. Notes: The pipeline projects ranked by more certainty to less certainty for export. Several factors could prevent Malawi from fully leveraging the potential of the mining sector to drive long-term growth and poverty reduction. Across the region, many countries have had limited success in converting subsoil wealth into sustainable prosperity (Cust and Zeufack 2023). In Malawi, limited institutional capacity, weak sectoral governance, and inadequate infrastructure pose especially serious risks. The authorities have limited experience managing the environmental and social impacts of mining, and the legal and regulatory framework was not designed to accommodate a large mining sector. In addition, managing resource revenues presents serious fiscal and macroeconomic challenges that are separate from the governance of the mining sector itself. The government is striving to develop the policy and institutional arrangements necessary for a success- ful and responsible mining sector. In partnership with the World Bank, the government has launched the Mining Sector Diagnostic Study and is formulating an ETM Roadmap. The ETM Roadmap is aligned with key regional and continental strategies, including the African Mining Vision,7 the African Union’s Continental 6 The ETM Roadmap will focus on several key areas to support the sustainable development of Malawi’s mining sector. These include improving geological data to support exploration, strengthening sector governance for better transparency and accountability, and reducing barriers to attract private investment in ETMs. It will also prioritize developing a competitive fis- cal regime, ensuring affordable and reliable low-carbon electricity for mining, and enhancing transportation and logistics infrastructure to facilitate exports. The roadmap aims to promote local employment and skills development, ensure dura- ble community partnerships, strengthen environmental management practices, and attract investment in ETM processing to drive local industrial growth. 7 The Africa Mining Vision (2009) was drafted to define a vision for the transparent, equitable and optimal exploitation of mineral resources to underpin broad-based sustainable growth and socio-economic development across Africa. See: https:// au.int/en/ti/amv/about 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 49 Commodities Strategy,8 and the Malawi 2063 national vision to ensure consistency with the country’s long- term development goals and the broader regional integration agenda. Once the ETM Roadmap is complet- ed, the government will be better equipped to define and articulate a clear vision and "whole-of-govern- ment approach" for leveraging the mining sector to drive sustainable development and deliver positive socioeconomic benefits. Updating the 2013 Mining Policy will provide a comprehensive, forward-look- ing framework for the mining sector that supports long-term economic growth and community welfare. Challenges Facing the Mining Sector The new Mining Sector Diagnostic (World Bank 2025b, forthcoming) highlights the limited pro- gress made thus far in developing Malawi’s industrial mining sector. Key challenges identified in- clude: (i) the perception of Malawi as an inexperienced and therefore high-risk jurisdiction; (ii) limited institutional capacity to manage the mining sector; (iii) insufficient energy and transportation infra- structure; (iv) unrealistic stakeholder expectations regarding the sector’s ability to deliver immediate socioeconomic benefits; (v) the volatility of international commodity markets; (vi) and a lack of work- force skills to support an emerging mining sector. Challenge #1: The perception of Malawi as an inexperienced mining jurisdiction Additional foreign investment in mineral exploration and mining operations will be necessary to support the continued development of the mining sector. Without new foreign investment, new mineral deposits will remain undiscovered, and the development and production of the mines will be delayed. The discovery of further mineral resources will ensure continued investment in mining and may help diversify mineral exports. Governments in developing economies like Malawi must compete to attract investment, and ge- ological potential alone is not enough. Investors are increasingly cautious about undertaking large, complex projects in countries with weak public institutions and unpredictable or opaque regulatory environments. Successful resource-rich countries attract investment by providing clarity, consistency, and stability in their legal and regulatory frameworks. Their laws and policies clearly define the roles and responsibilities of the government and investors and are supported by transparent decision-mak- ing processes. In recent years, the government has made strides in attracting investment by sponsoring geodata acquisition programs. The country now has regional geological data, including airborne geophysics and 1:100,000 scale geological maps. Malawi has also developed a GIS-based cadaster system, is actively converting to a digital geological data system, and has joined the Extractive Industries Transparency Initiative, all of which are positive steps. However, the lengthy and complex process for obtaining mining licenses and approving MDAs has created considerable uncertainty for investors. Delays in these processes can discourage investors and reduce the profitability of projects. Prolonged delays in signing MDAs have increased perceptions of risk among international investors, which are compounded by a lack of clarity in the legal framework and fiscal regime. Under the current legislation, the government has unlimited free carried interest in min- ing companies, which creates uncertainty around the government’s participation in the sector. Going forward, Malawi’s laws, policies, and regulations need to balance the goal of attracting investment with the need to ensure sustainable, long-term socioeconomic benefits for the country and its citizens. 8 The African Union’s Commodities Strategy (2019) focuses on transforming Africa from a raw materials supplier by enabling countries to add value, extract higher rents from commodities, integrate into global value chains promote diversification anchored in value addition and local content development. Refer to: https://au.int/en/flagships/african-commodities-strategy 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 50 Challenge #2: Limited institutional capacity to manage the mining sector The government must build its capacity to initiate, monitor, tax, regulate, and close large-scale min- ing projects. The budgets, equipment, staffing, and resources of the Ministry of Mining, Geological Survey Department (GSD), the MMRA, and MEPA are inadequate to fulfill their mandates. The govern- ment departments indirectly linked to the mining sector, such as the Ministry of Finance and Economic Affairs, the Ministry of Justice, the Malawi Revenue Authority, and local governments at the district level have limited the capacity to negotiate and manage MDAs and other contracts, monitor environ- mental quality and enforce relevant laws, collect taxes and fees, manage mining revenue, and ensure responsible mine closure and post- closure monitoring. The international experience has shown that building institutional capacity in the mining sector is very difficult in the absence of operating mines. The Malawi Revenue Authority faces significant capacity constraints due to insufficient staff train- ing, outdated systems, and limited technological resources. A lack of adequate storage spaces, ware- houses, depots, weighbridges, and gates inhibits the handling and clearance of mined minerals for export. Without efficient customs procedures and sufficient storage facilities, customs operations are delayed, creating bottlenecks at border posts. Addressing these capacity issues is essential to improve trade efficiency, boost mineral exports, and realize the full economic benefits of Malawi’s mining sector. A dearth of accredited laboratories limits the government’s ability to accurately assay samples to ensure the quality of mineral exports. The Malawi Bureau of Standards lacks a national accreditation program for minerals. The existing laboratory at the GSD is underfunded, unaccredited, and undereq- uipped. Accredited laboratories are essential to ensure the integrity, competitiveness, and long-term sustainability of the mining sector. They use internationally recognized standards for mineral analy- sis to determine the quality, grade, and value of extracted minerals and mineral exports, fostering trust with global buyers and investors while also enabling the country to secure fair prices for its resources on the global market. Accredited laboratories are also vital to ensure compliance with environmental regulations, trade agreements, and safety protocols. Governments may have difficulty ascertaining the value of exported mineral products, particularly intermediate products or concentrates, when markets offer limited information on pricing. For example, the pricing of rare earth concentrates is not necessarily straightforward, and the market for metals traded on long-term contracts can be opaque without a spot market that has sufficient liquid- ity to allow for price discovery. The government needs to strengthen the capacity of the GSD and MMRA to accurately value mineral exports by obtaining real-time information on prices for bulk minerals and feedstock, intermediate mineral products, and refined products. The government should also ensure it has sufficient capacity to accurately monitor production volumes at mining sites and verify that it has received the correct amount of tax and royalty payments based on that output. Challenge #3: Inadequate energy and transport infrastructure Malawi is a landlocked country and its access to global markets hinges on foreign seaports, primar- ily Beira and Nacala in Mozambique and Dar es Salaam in Tanzania. Each of these ports is subject to delays, congestion, and high transport costs. The long distances between mining operations and the nearest ports, combined with limited port capacity, increase costs and turnaround times for ship- ping minerals abroad and importing equipment and consumables. The lack of sufficient warehousing and logistics facilities at these ports also means that exporters face additional challenges in efficiently managing the flow of goods. Mining projects depend heavily on reliable logistics to import essential equipment and export products to global markets. The state of Malawi’s road network is a significant barrier to the mining sector’s growth. Many of the country’s roads are in poor condition or otherwise inadequate for heavy mining equipment and 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 51 mineral shipments, especially in rural and remote areas where mining activities are concentrated. This infrastructure deficit increases transportation costs, delays the movement of essential capital goods and commodities, and increased wear and tear on vehicles and machinery. Poor roads also limit access to prospective mining areas, which can delay exploration and development projects. The lack of efficient road transportation infrastructure increases the cost of doing business for mining companies, as they must invest in maintaining their own roads or hire specialized transportation services. Malawi’s rail infrastructure is similarly underdeveloped and poorly integrated with the broader regional transport network, presenting another obstacle for the mining industry.9 While rail trans- port is typically more cost-effective for bulk minerals, the country’s limited rail network is largely out- dated, with some lines in disrepair and others inadequately connected to key mining regions. The main rail route, linking Malawi with neighboring countries, is underutilized, and there are few effi- cient rail connections to major mineral-producing areas or export hubs. This lack of reliable rail infra- structure forces mining companies to rely heavily on road transport, which is both costly and ineffi- cient. Inefficient transport services also contribute to congestion at ports and border crossings, creating bottlenecks in the export supply chain. Malawi’s mining industry needs roughly 60 – 100MW of power in the medium term and up to 160MW power in the long term. To reduce costs and risks, this power should be supplied by the country’s own renewable energy resources. Malawi heavily relies on hydroelectric power, which is vulnerable to drought. To enhance the national power supply, the government (with support from development part- ners and investors) is preparing the Mpatamanga Hydropower Storage Project (Figure 2.7). The timely, well-coordinated development of the mines, the power plant, and the necessary transmission systems will be crucial to the financial stability of the mining and energy sectors. Offering mines priority access to power from the national grid could address a major source of uncertainty for international investors. FIGURE 2.7  The mining projects in the pipeline will greatly increase energy demand Projected Installed Capacity a. Base Case Scenario b. Best Case Scenario 160 160 140 140 120 120 100 100 80 80 MW MW 60 60 40 40 20 20 0 0 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 Makanjira Songwe Kangankunde Malingunde Kayelekera Kanyika Kasiya Source: World Bank staff projections based on publicly available information 2024. Challenge # 4: Unrealistic stakeholder expectations Unrealistically high stakeholder expectations regarding the mining sector’s impact on job creation, infrastructure improvements, and fiscal revenue pose challenges for policymakers. The complex- ities of mining operations — including lengthy permitting processes, technical hurdles, and volatile 9 Ministry of Transport and Public Works 2024. 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 52 global commodity prices — can result in large gaps between expectations and reality. In turn, frustra- tion and disillusionment among stakeholders can complicate efforts to build a productive and collab- orative mining environment. The experience of Kayelekera’s initial operation highlights both the potential benefits and risks involved in mining. Originally estimated at nine years, the life of the Kayelekera mine was cut to just four years after the Fukushima nuclear plant accident depressed global uranium prices (Box 2.1). Despite generating significant export earnings during its short period of operation, the Kayelekera project has also required prolonged care and maintenance, and the loss of jobs after the mine’s closure cemented its failure to meet community expectations. Although the opening and closing of mines due to com- modity price shocks is common in the industry, it is important to manage public expectations and ensure awareness of the economic risks of mining operations to avoid overly optimistic assessments of resource-driven wealth. BOX 2.1  Lessons from Kayelekera’s brief initial operation In August 2009, the first shipment of uranium mined from water-mitigation measures were not transparent. Many interna- Kayelekera was sent via Zambia to Walvis Bay, Namibia.a As tional news outlets also reported on the vague resettlement plans the deposit’s grade is below that of Tier 1 deposits, commodity and unclear compensation offered to local households. However, prices must exceed a higher threshold for the mine to be eco- recent water and soil tests conducted by international scientists nomically viable. Following the discovery of the deposit in 1980, found radiation levels below the World Health Organization’s rec- several attempts were made to test its economic viability, but only ommended limit, and a health assessment showed a low can- after 2009, when the price of uranium was around US$46 per cer risk to the community.b Based on this analysis, the Kayelekera pound, did the project attract foreign investment. The life of the area does not appear to be radiologically compromised. mine was initially calculated to be nine years, and this period could have been extended by exploration and/or higher uranium prices. With uranium prices rising once again, Kayelekera could resume operation within the next year, but this will require strong coop- The Kayelekera project faced major challenges during its oper- eration between industry and government. Many community ation that delayed investment returns. Technical issues with the concerns related to land, radiation, and water pollution can be mit- processing methodology required significant modifications to the igated through a strong legal framework and close government newly constructed plant, and a landslide in the mine in 2010 neces- monitoring. The authorities and project sponsor should establish a sitated remediation work as well as the relocation of certain parts common framework to ensure a stable, high-performing operation of the plant and machinery. After the Fukushima reactor accident that provides good job opportunities. The project sponsors should caused a drop in global uranium prices, Kayelekera ceased to be be fully transparent in their approaches to stakeholder engagement viable and was put under care and maintenance in 2014. and corporate social responsibility, which should conform to inter- During its brief operation, the Kayelekera project generated national best practices. The government should support the pro- high public expectations that were not met. The mine’s long ject by fully enforcing environmental regulations and social policies idle period greatly diminished its financial performance, and the while applying international standards and procedures as needed. promise of long-term jobs was unfulfilled. At its peak in 2012, the Additionally, the government must be in a position to manage, mine employed 759 workers, all of whom were laid off between monitor, and inspect the operation to assure safety and protect the 2014 and 2024. In addition, the initial project sponsor’s approach public welfare. It will also be important to manage expectations by to community stakeholder engagement was not effective, and raising awareness of the economic risks entailed by the operation environmental disclosures related to radiation, tailings, and and the remaining life of mine. a. Nuclear Energy Agency and International Atomic Energy Agency 2022. b. Majawa et al. 2024. Challenge #5: Price volatility in the global metal markets Managing the fiscal volatility generated by the mining sector can be challenging, as mineral prices are highly sensitive to global market fluctuations. Supply-demand imbalances, geopolitical events, technological advancements, and economic cycles all influence commodity prices, which can lead to unpredictable revenue streams that make it difficult to achieve long-term budget objectives. Sudden price drops can result in budget deficits, leading to cuts in public services, delays in infrastructure projects, or an increased reliance on borrowing, while price booms can create unsustainable fiscal ex- pansions or inflationary pressures. Sharp fluctuations in resource revenues can also destabilize the exchange rate. 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 53 Price volatility driven by geopolitical or technical factors could pose significant risks for Malawi. For example, China dominates the midstream and downstream processing and extraction of rare earth elements, and limited competition in these segments can adversely affect project financing, opera- tional resilience, and sustainability. Moving quickly to enter the market and brand the mineral product while forming relationships with key players can help build confidence in Malawi as a stable supplier. Well-designed fiscal policies can mitigate the risks posed by price volatility. Stabilization funds can help smooth the budgetary impact of unpredictable revenues. Forward contracts and hedging can lock in prices for future exports, providing greater certainty around revenue inflows. On the monetary side, central banks can work to stabilize the currency through foreign-exchange operations and interest-rate adjustments. Fiscal policies should also be flexible enough to adjust to revenue changes without desta- bilizing the economy. Effectively managing mineral revenues requires a comprehensive approach that combines long-term savings, fiscal discipline, and strategic planning to ensure stable growth and min- imize the negative fiscal and economic impacts of price fluctuations. Challenge #6: Human capital deficit for an emerging mining sector Malawi’s mining sector faces a significant human capital deficit, due largely to the lack of opera- tional industrial mines and specialized education programs. The country offers few university-level mining courses, resulting in a shortage of skilled professionals in key areas such as geology, engineer- ing, mineral processing, and environmental management. Project sponsors typically prefer local work- ers over expatriates due to the high costs of travel and accommodation, but this skills gap limits the ability of companies to find experienced staff and hampers the sector’s development. As new mines are developed over the next decade, opportunities for apprenticeships, industry placements, and intern- ships will be essential to build a skilled workforce. High turnover rates among experienced staff pose a further challenge, as professionals from the Ministry of Mines and universities often leave for higher-paying jobs in the private sector. Staff turn- over weakens the government’s institutional capacity and risks depleting the knowledge base at key educational institutions. Collaboration between the government, universities, and the private sector will be crucial to retain talent and build a sustainable cadre of experienced professionals. Priorities for Mining Sector Development Pillar 1: Enabling the mining sector’s growth In the immediate term, the government should prioritize operationalizing projects that are in the pipeline by expediting MDA negotiations and finalizing the issuance of mining permits. Engaging independent, impartial legal experts and transaction advisors during these negotiations would help the government secure a fair and equitable agreement. The international experience shows that ne- gotiating MDAs can be a complex and time-consuming process, and managing them can be challeng- ing. Disputes between governments and mining companies over contract terms are common and of- ten lead to arbitration. It will be important for the government to continue building its capacity to effectively negotiate MDAs. Successful negotiations require a wide range of expertise, including knowledge of geology, re- source terminology, mineral processing, metallurgy, mine engineering, financial modeling, law, tax policy, and international metal markets. According to findings from the Mining Sector Diagnostic, government officials have a generally negative view of their ability to negotiate favorable terms with mining companies. The authorities will need to develop the knowledge and skills to handle MDA con- tract negotiations effectively, and engaging transaction advisors can provide on-the-job training for 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 54 government officials. This approach has proven successful elsewhere in strengthening contract-nego- tiation skills within a multidisciplinary team. The government should continue to actively promote investment in mineral exploration and mining. Developing at least one medium-to-large-scale mining project would send a strong signal to interna- tional investors that mining in Malawi is viable. The experience generated by this initial project would enable foreign investors to better understand the risks of operating in Malawi and would likely gener- ate renewed interest in the sector. Launching a large-scale project would also provide an opportunity to stress-test and strengthen the government’s regulatory, commercial, and fiscal systems, offering val- uable lessons for future efforts to build capacity through “learning-by-doing.” De-risking the mining sector requires robust geoscientific research, transparent sharing of geological data, and an efficiently managed permitting process. Formulating comprehensive investment-promotion plans would help ensure that the roles and responsibilities of all relevant agencies are clearly defined. In addition, train- ing will be necessary to enhance the government’s ability to promote investment in the sector, and gov- ernment officials must be made aware of the criteria investors use when making investment decisions. Building the capacity of sectoral institutions to effectively monitor large-scale mining operations and manage MDAs will require fully operationalizing the MMRA and strengthening district-level of- fices. Enhanced coordination and collaboration between government agencies will help streamline processes related to land tenure, construction permitting, and oversight. The responsible use of water and other natural resources should be integrated into the permitting process with the involvement of the relevant government agencies. Developing an ETM Roadmap would enable the authorities to systematically evaluate the country’s infrastructure and identify industrial diversification opportunities relevant to the mining sector. This roadmap should also explore opportunities for regional collaboration and the development of val- ue chains through coordinated investments with neighboring countries. The first step will be to assess gaps in logistics infrastructure, including regional ports, cross-border transport links, and renewable energy systems. Improving road infrastructure and increasing energy access are especially critical to attracting more investment in mining and related industries. The government should also assess rel- evant skills gaps and formulate a plan to develop the human capital necessary to support the growth of the mining sector. In the short-to medium term, an updated mining regulatory framework and capacitation of the MMRA can help ensure predictability and stability. The ETM Roadmap will help the government artic- ulate a long-term vision for how the mining sector can enable broad-based development and economic transformation. The Mines and Minerals Act was amended in 2023 to establish the MMRA, and several regulations related to medium- and large-scale mining operations, as well as community development agreements, are currently under review. Well-designed regulations, developed through comprehensive consultation, are less likely to require frequent revisions, fostering the stable and predictable regula- tory environment essential for building long-term confidence in the mining sector. The Mines and Minerals Act must be aligned with other relevant regulations and laws across all lev- els of government. Conflicting clauses or ambiguities can create confusion and complicate the admin- istration of the mining sector. A thorough review and reconciliation of all laws applicable to medium- and large-scale mining operations is crucial to enhance accountability, clarify liability, and create a more efficient and transparent regulatory environment for the sector. In the short-to-medium term, establishing accredited laboratories will be crucial to support the mining sector. National laboratory services, accreditation programs, and standardized practices are essential at every stage of mining, from exploration and investment to quality control and tax collec- tion. The lack of accredited laboratories in Malawi limits the government’s ability to verify the qual- ity of mineral exports and administer taxes accordingly. The Malawi Bureau of Standards does not 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 55 have a national accreditation program, and the existing laboratory at the GSD is underfunded, poorly equipped, and unaccredited. Addressing the lack of accredited laboratories is critical to ensure the integrity of mineral exports, improve sector competitiveness, and support the long-term sustainabil- ity of the mining industry. Pillar 2: Social and environmental protection In the immediate term, it will be important to ensure that MEPA has adequate resources to carry out its mandate. Environmental monitoring is essential to the responsible development of large-scale mining operations. However, MEPA lacks sufficient budgetary resources, equipment, and staff, and its responsibilities in agriculture and other sectors are straining its limited capacity. The added burden of overseeing mining-related activities, including monitoring compliance with environmental laws, MDAs, environmental and social impact assessments, resettlement action plans, community develop- ment agreements, and mine closure and rehabilitation plans, represents a significant challenge for the agency. MEPA requires adequate resources to effectively monitor mining sites. In addition, making all documents related to mining development publicly available would help to increase transparency and support community-based environmental monitoring. A review of the OHS and Welfare Act and its accompanying regulations is essential to ensure they align with international mining standards and best practices for safe operations. While mines in Malawi generally comply with national laws, these laws often fall short of global safety standards. OHS regula- tions in countries with limited experience in mining often lack clear lines of accountability, which can pose significant reputational risks to the mining industry and its products in international markets. To foster a safe work environment and minimize risks, mining operations must prioritize human rights and OHS over short-term profits. Ensuring that OHS regulations and public welfare standards meet or exceed international best practices would help safeguard the welfare of workers and the public while mitigating the reputational risks associate with the mining sector. The government’s local-content policies should clarify how local communities living in mining areas will be made aware of their rights. The mining industry is complex and unfamiliar to many communi- ties in Malawi, leading to information gaps that could cause social tension. The government and mining companies should engage in regular outreach to communities and civil society organizations to bridge the gap and avoid delays or operational disruptions. To foster openness and trust among stakeholders in the mining sector, the authorities could establish formal public-private dialogue campaigns led by the Ministry of Mining, the Malawi Chamber of Mines, and the Council for Non-Governmental Organizations. In the short term, setting up a credible and effective platform for multi-stakeholder engagement would help foster an inclusive dialogue around the development of the mining sector. Malawi has joined the Extractive Industries Transparency Initiative, a global coalition of government entities, ex- tractive companies and civil society organizations working together to improve openness and account- ability in management of revenues from natural resources. At its core is the multistakeholder work- ing group, which the government can leverage as a key platform for improving sectoral dialogue and building trust. Pillar 3: Benefit realization and management It will be important for government to accurately value mineral exports by obtaining real-time information on commodity-market pricing for bulk minerals and feedstock, as well as intermedi- ate and refined mineral products. The mining sector generates fiscal revenue and other benefits via taxes, equity dividends, capital investments, local supply opportunities, and human capital develop- ment. Over the coming years, mining exports are expected to become an important source of public 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 56 revenue and foreign exchange. Building sufficient capacity to monitor mineral reserves and produc- tion volumes will be crucial to ensure that the government receives the correct amount of tax and roy- alty payments from mining companies. The government can enhance its capacity for customs and tax administration by providing target- ed training to customs officers on international best practices for mining exports and by imple- menting automated customs management platforms and electronic tracking systems. Investments in expanding and upgrading customs infrastructure, such as storage facilities, weighbridges, and bor- der posts and gates, reduce delays in export processing. Fostering coordination between customs offi- cials, mining regulators, and other agencies is crucial to ensure efficient revenue administration, and enhanced regional cooperation can address cross-border trade bottlenecks. Reviewing and streamlin- ing export regulations, incentivizing compliance, and conducting regular audits can further enhance efficiency. Finally, public-private partnerships with mining companies can support capacity develop- ment and infrastructure investments. These measures will help optimize customs operations, improve trade efficiency, and boost the economic potential of Malawi’s mining sector. To attract investment in the mining sector while also ensuring that it generates sustainable, long- term socioeconomic benefits, the government will need to both elaborate and refine its policy frame- work. A fiscal-competitiveness assessment and a tradeoff analysis of state participation could inform more efficient policies, laws, and regulations. For example, the government’s unlimited free carried interest in mining companies creates significant uncertainty for foreign investors, and potential reform measures should be identified and assessed. A comprehensive skills-gap analysis that identifies key areas where specialized expertise is lacking can support the building of human capital for the mining sector. This analysis would involve close col- laboration between the Ministry of Mines, universities, and private sector stakeholders to assess current workforce needs and anticipate future skill requirements as new mines are developed. Prioritizing the establishment of specialized educational programs, including university-level mining courses and ac- credited training centers, would help ensure that both new and existing professionals are able to obtain the necessary skills.10 Promoting the creation of apprenticeships, internships, and industry placements could help build practical experience for young professionals and address the high turnover among experienced staff. A long-term strategy focused on education, industry collaboration, and worker re- tention will be critical to develop a skilled workforce capable of supporting a growing mining industry. Local-content policies can increase the domestic economic benefits generated by the mining sec- tor. Incentivizing mining companies to hire locally, procure goods and services from Malawian sup- pliers, and establish partnerships with local businesses can boost spillover effects, foster the growth of local firms, and create sustainable employment opportunities. These policies can also foster local value addition and reduce reliance on exports of raw minerals. By supporting the development of process- ing plants and providing incentives for businesses involved in value addition, Malawi can increase its participation in global markets and build a more diversified economy. Requiring firms in the mining industry to adopt international standards for safeguarding human rights will be vital to promote the long-term development of a responsible and sustainable min- ing sector. These standards include the Voluntary Principles on Security and Human Rights, the UN Guiding Principles on Business and Human Rights, and the Human Rights Due Diligence Guidance of the International Council on Mining and Metals, as well as International Labour Organisation best practices, IFC Social and Environmental Performance Standards, and the UN Principles on Business and Human Rights. The government should also consider requiring all mining companies to adhere to the 10 Several of the country’s universities have recently established degree programs in mining, metallurgy, geology, and other rele- vant fields. 2. Unlocking the Potential of Malawi’s Mining Sector amid the Global Energy Transition 57 OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas, which requires that they treat child labor as a serious human rights abuse that they will not tolerate, profit from, or facilitate in any way. Over the medium term, insulating the national budget process from cyclical fluctuations in miner- al revenues will reinforce macroeconomic stability. Mineral prices are inherently volatile. Creating a stabilization mechanism with clear and transparent budget rules could help smooth the revenue im- pact of the mining sector and ensure that a share of current mineral revenues is available for future spending. Clear rules should define the amounts to be deposited into the fund and the conditions for withdrawals. As mineral exports rise, it will be important to continue stabilizing the exchange rate by accumulating foreign-exchange reserves. 58 REFERENCES African Union. 2019. “African Union’s Commodities Strategy.” Ministry of Transport and Public Works. 2024. “Beira to Marka African Union. 2009. “Africa Mining Vision.” railway opens for both dry and wet cargo.” September 2024. Resource Centre/Top News. Anderson, Weston, Mazvita Chiduwa, Joachim De Weerdt, Xinshen Diao, Jan Duchoslav, Zhe Guo, et al. 2023. “Mitigating the impact National Statistical Office. 2024. “Trade Bulletin.” October 2024. of El Niño on hunger in Malawi.” Malawi Strategy Support Zomba: National Statistical Office, Government of Malawi. Program - Policy Note 51.” Washington DC: International Food Nuclear Energy Agency and International Atomic Energy Agency. Policy Research Institute (IFPRI). 2022. “Uranium Resources, Production and Demand.” Cust, James and Albert Zeufack, ed. 2023. “Africa’s Resource Future: S&P Global Market Intelligence. 2023. “Mining Exploration Trends Harnessing Natural Resources for Economic Transformation Overview 2023.” during the Low-Carbon Transition.” Africa Development United Nations Office for the Coordination of Humanitarian Affairs Forum. Washington DC: World Bank. (OCHA). 2024. “Southern Africa: El Nino Forecast an Impact.” Guj, Pietro, Richard Scodde, Boubacar Bocoum, and James Cust. World Bank. 2023. “Malawi Country Economic Memorandum.” 2025, forthcoming. “Mineral Resources of Africa.” Washington DC: World Bank. IMF. 2024. “World Economic Outlook.” Washington DC: World Bank. 2024a. “Commodity Markets Outlook.” Washington International Monetary Fund. DC: World Bank. International Monitory Fund (IMF)/World Bank. 2025, forthcoming. World Bank. 2024b. “Malawi Economic Monitor. Reforming with “Debt Sustainability Analysis.” Urgency. Malawi’s Path to Economic Stability.” Washington DC: Integrated Food Security Phase Classification (IPC). 2024. “Malawi: World Bank. Acute Food Insecurity Situation for May - September 2024 and World Bank. 2024c. “Macro Poverty Outlook.” Washington DC: Projection for October 2024 March 2025.” Rome: Integrated World Bank. Food Security Phase Classification. World Bank. 2025a, forthcoming. “Global Economic Prospects.” International Energy Agency. 2021. “The Role of Critical Minerals in Washington DC: World Bank. Clean Energy Transitions.” World Bank. 2025b, forthcoming. “Mining Sector Diagnostic Majawa, Louis John, Oluwaseyi Jegede, and Makondelele Victor — Malawi.” Tshivhase. 2024. “The radioactive contamination of ground and surface water near a uranium mine in Malawi.” Brazilian Journal of Radiation Sciences 12.1.