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Cover image: “Different People Together” by Andrew Missi Cover design, interior design and typesetting: Piotr Ruczynski, London, United Kingdom CONTENTS Acknowledgements 7 Abbreviations 8 Overview 9 1 Economic Developments 16 1.1 Global and Regional Context 17 Global growth conditions have remained steady despite challenges 17 1.2 Recent Economic Developments 19 Economic growth failed to meet expectations in 2023 and will likely remain subdued in 2024 19 Foreign-exchange inflows continue to fall short of demand 24 Inflation has moderated slightly, but risks remain elevated 27 Persistent fiscal slippages jeopardize Malawi’s economic recovery 28 Debt sustainability hinges on successful restructuring and fiscal adjustment 31 The exchange-rate spread has narrowed following the devaluation, but planned reforms to increase flexibility have yet to be fully implemented 32 Monetary tightening has been insufficient to contain inflationary pressures 33 The financial sector remains stable, with commercial banks reporting a very strong performance in 2023 33 1.3 Medium-Term Economic Outlook 35 Policy Priorities: restoring macroeconomic stability, protecting vulnerable households against shocks, and increasing production and exports 36 2 Malawi’s Social Protection System Adapts to Mounting Risks 38 Introduction 39 Social Protection in Malawi: An Expanding and Innovative System Able to Respond to Shocks 40 The Social Protection System and Infrastructure 42 Social Protection as an Adaptive Crisis Response Tool 45 The Future of Adaptive Social Protection in Malawi: Scalable Safety Nets 46 Building on a Strong Foundation: The Future of Malawi’s Shock-Responsive Social Protection System 47 APPENDIX A Macroeconomic Indicators 50 References 51 BOXES BOX 1.1 Further AIP reforms can strengthen climate BOX 1.4 The importance of transparency in the resilience 20 prioritization of the Public Sector Investment Programme 29 BOX 1.2 New national electronics payment gateway BOX 2.1 A brief overview of social protection 40 will support e-commerce transactions, social cash BOX 2.2 Conditional and unconditional cash transfers 42 transfers, and revenue collection 23 BOX 1.3 A new effort to develop Special Economic Zones calls for close oversight and learning lessons from past experiences 26 FIGURES FIGURE 1.1 Global growth has held up despite FIGURE 1.17 Lower real petrol prices are associated simultaneous monetary tightening, and inflation is declining 17 with higher imports 26 FIGURE 1.2 Interest rate cuts have recently started FIGURE 1.18 Inflation continues to increase broadly in exceeding rate hikes 17 line with the growth of the money supply 27 FIGURE 1.3 Malawi's economy continues to lag the FIGURE 1.19 Maize prices have been a key factor in performance of its neighbors' 18 rising inflation 27 FIGURE 1.4 Growth for 2024 is expected to increase FIGURE 1.20 Malawi is again on the path to have one relative to previous years but is still expected to be lower of the highest fiscal deficits in Sub-Saharan Africa 28 than anticipated due to the impacts of the drought on FIGURE 1.21 Reduced expenditures and higher agriculture GDP 19 revenues are anticipated in the approved FY2024/25 budget 28 FIGURE 1.5 Malawi has experienced its third FIGURE B1.1.4 While some public investment consecutive decline in annual maize production in 2023 19 projects struggle, others deliver on time and on budget 29 FIGURE B1.1.1 Increased spending on fertilizer FIGURE 1.22 The share of Treasury securities in total subsidies does not necessarily lead to increased maize debt is increasing 31 production 20 FIGURE 1.23 Increased government borrowing since FIGURE 1.6 Food insecurity is already worse than in 2016 is crowding out private-sector credit 32 previous years 21 FIGURE 1.25 The exchange-rate spread stabilized FIGURE 1.7 The share of economically inactive people after the November 2023 devaluation but have since has increased in 2024, especially in urban areas 21 begun widening again as reserves remain low 32 FIGURE 1.8 Despite declining wages, rural southern FIGURE 1.24 Government borrowing is increasing Malawians are becoming more likely to engage in from all domestic sources 32 temporary labor 22 FIGURE 1.26 The real policy rate remains negative, FIGURE 1.9 Most Malawians believe that their current but base lending and interbank rates have increased… 33 situation is worse than it was a year ago, while 68 percent think that their future will be the same or even worse 22 FIGURE 1.27 …and government borrowing yields have risen substantially over the last year 33 FIGURE 1.10 Malawi’s terms of trade have improved… 24 FIGURE 1.28 Financial stability indicators have FIGURE 1.11 …but imports continue to exceed exports 24 proven resilient 34 FIGURE 1.12 Since the devaluation of the kwacha in FIGURE 1.29 Community, social, and personal November 2023, most imports have declined in value terms 24 services remain the focus of private credit 34 FIGURE 1.14 Foreign-exchange liquidity remains very low 25 FIGURE 1.30 Recent trends echo those of the early 1990s 36 FIGURE 1.13 After a substantial depreciation in FIGURE 2.1 Poverty and droughts 39 November, Malawi’s real exchange rate is appreciating again 25 FIGURE 2.2 The number of SCTP beneficiaries 41 FIGURE 1.15 Substantial foreign-exchange sales were not able to meet market demand 25 FIGURE 2.3 SCTP eligibility criteria 41 FIGURE 1.16 As domestic fuel prices fell, the share of FIGURE 2.4 The scalability mechanism 46 fuel in total imports increased 26 TABLES TABLE O.1 Priority policy areas and key actions 12 TABLE 2.1 Institutions currently using UBR data 44 TABLE 1.1 Fiscal Accounts 30 TABLE 2.2 Scaled-up coverage for SCTs 47 TABLE 1.2 Priority policy areas and key actions 37 7 ACKNOWLEDGEMENTS The Malawi Economic Monitor (MEM) analyzes economic and structural development issues in Malawi. This 19th edition was published in July 2024 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), Efrem Zephnath Chilima (Senior Private Sector Specialist, Task Team Leader), Yumeka Hirano (Economist, Task Team Leader), Chipo Msowoya (Senior Social Protection Specialist), Michele Davide Zini (Senior Economist), Hayaan Nur (E T Consultant), Innocent Njati Banda (Financial Sector Specialist), Dipti Thapa (Senior Agriculture Economist), Time Fatch (Senior Agriculture Economist), Bobojon Yatimov (Senior Agriculture Specialist), Evie Calcutt (Senior Financial Sector Specialist), Ivan Drabek (Senior Social Protection Specialist), Lina Marcela Cardona (Senior Economist), Vandras Lilato Nyambe Mukete Luywa (Social Protection Specialist), Astrid Uytterhaegen (Operations Officer), Anwar Mussa (Economist), Massimo Sichinga (E T Consultant), Alexandra Soininen (Consultant), Louis Boghoyo Msuku (Consultant), Apphia Ndungu (Consultant), Lucy Nyirenda (Consultant), Amschel Nathaniel de Rothschild (Consultant) and Peter Pojarski (Consultant). The report was edited by Sean Lothrop (Consultant). Abha Prasad (Practice Manager, Macroeconomics, Trade and Investment), Robert Chase (Practice Manager, Social Protection and Jobs), Hugh Riddell (former Country Manager, Malawi), Firas Raad (Country Manager, Malawi), Preeti Arora (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 Colin Andrews (Senior Social Protection Specialist) and Melanie Trost (Senior Economist) 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 National Statistical Office; other government ministries, depart- ments, and agencies; as well as the International Monetary Fund. The team would like to thank repre- sentatives of the private sector and civil society organizations in Lilongwe and Blantyre for their help- ful contributions. Henry Chimbali (External Affairs Officer), Karima Laouali Ladjo (Team Assistant), and Demister Misomali (Team Assistant) provided assistance with external communications, design, and addition- al 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 June 30, 2024. 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) and Efrem Chilima (echilima @worldbank.org). 8 ABBREVIATIONS AIP Affordable Inputs Programme ARC African Risk Capacity Group CCT Conditional Cash Transfer CS-EPWP Climate Smart Enhanced Public Works Program CUCI COVID-19 Urban Cash Initiative DFS Digital Financial Services DODMA Department of Disaster Management Affairs EFT Electronic Funds Transfer EMDEs Emerging Markets and Developing Economies EU European Union FY Fiscal Year GDP Gross Domestic Product IMF International Monetary Fund MDTF Multi-Donor Trust Fund MEM Malawi Economic Monitor MITASS Malawi Interbank Transfer and Settlement System MITC Malawi Investment and Trade Centre MoFEA Ministry of Finance and Economic Affairs MPC Monetary Policy Committee MPO Macro Poverty Outlook MK Malawian Kwacha NCG Net Credit to Government NePG National Electronic Payment Gateway NLGFC National Local Government Finance Committee NPLs Non-Performing Loans NSO National Statistics Office PSIP Public Sector Investment Programme RBM Reserve Bank of Malawi ROA Return on Assets ROE Return on Equity SADC Southern African Development Community SCTP Social Cash Transfer Program SEZ Special Economic Zone SSRLP Social Support for Resilient Livelihoods Project UBR Unified Beneficiary Registry UCT Unconditional Cash Transfer UNICEF United Nations International Children’s Emergency Fund UNCTAD United Nations Trade and Development US$ United States Dollar WEO World Economic Outlook WFP World Food Programme 9 OVERVIEW A drought and an incomplete reform agenda undermine prospects for a rapid economic recovery Economic growth in Malawi fell short of expectations in 2023 and is projected to remain subdued in 2024. While implementation of planned macroeconomic and structural reforms is expected to boost Gross Domestic Product (GDP) growth over the medium term, an El Niño-induced drought has wors- ened the near-term growth outlook. The drought has compounded longstanding macroeconomic imbal- ances, with large fiscal deficits, balance-of-payments challenges, unsustainable debt, and price insta- bility weighing on economic activity since 2020. As a result, the growth projection for 2024 has been revised downward to 2.0 percent. With average population growth at 2.6 percent, GDP is expected to decline in per capita terms. A weak harvest has intensified food insecurity. The production of staple foods has fallen behind na- tional needs, preventing a large share of households from accessing sufficient nutrition. Many house- holds are expected to enter the 2024/25 lean season with limited food stocks, depleted finances, and precarious health conditions. The success of Malawi’s El Niño response will hinge on timely action and the effective prioritization of interventions. Given the grain deficit in the country, limited food stocks in the region, and little recent progress in expanding irrigated maize production, increased grain im- ports are urgently needed. A difficult business environment and the persistent underperformance of the Malawian economy compound the challenges facing households and the private sector. Many businesses must contend with foreign-exchange shortages and exchange-rate policy uncertainty, which discourages investment and results in slow job creation. As a result, the private sector is unable to generate sufficient high-qual- ity jobs to sustainably improve the welfare of most Malawians. Efforts to balance the external accounts have been slow and uneven, putting additional pressure on the exchange rate, driving foreign-exchange shortages and leading to further debt accumulation. The country’s terms of trade, however, have improved and now exceed pre-pandemic levels, driven by moderating international fuel and fertilizer prices and continued demand for Malawi’s key exports. Malawi’s reliance on tobacco exports increased in 2023, and diversification remains elusive. Official exports of products other than tobacco fell by 4 percent as prices for macadamia nuts fell and ground- nut export volumes declined. Mining, especially the production of materials necessary for the green energy transition, continues to hold great potential in the medium term, but large pipeline projects have yet to start production. Despite interventions by the Reserve Bank of Malawi (RBM), foreign-exchange liquidity remains low, with the spread between the official and parallel exchange widening. Recent inflows from interna- tional financial institutions notwithstanding, official foreign-exchange reserves stand at less than one month of import coverage, significantly below the more than 3 months deemed adequate by the author- ities. This situation highlights the scale of the country’s external imbalances and the inadequacy of its buffers. Total reserves, including those held by authorized dealer banks, are approximately 2.5 months. While international fuel prices have fallen and domestic prices have increased, fuel imports continue to erode foreign-exchange reserves. In the context of an inflexible official exchange rate, declining reserves have resulted in foreign-exchange rationing. This policy reduces incentives for banks, exporters, and Overview 10 investors to convert their foreign-exchange holdings into Malawian kwacha (MK) and pushes some for- eign exchange into the informal sector. Sustaining ongoing efforts by the RBM to significantly reduce sales of foreign exchange to the market will be critical to rebuild official reserves. Fiscal deficits, supply-side factors following a weak harvest, and monetary policy risks are increasing inflationary pressures After spiking in the wake of the November 2023 devaluation, inflation has remained consistently above 30 percent, and food-price inflation is particularly high. Inflation peaked at 35.0 percent in January before edging down to 31.8 percent in March, and again rising to 32.7 percent in May. Food prices have driven this trend, with rising prices for maize pushing food-price inflation to a high of 44.9 percent in January. The rapid growth of the money supply, fiscal indiscipline and limited supply fol- lowing a weak harvest continue to intensify price pressures. The fiscal deficit for FY2023/24 exceeded the approved and revised budgets, and the FY2024/25 budget again risks deviating from the planned fiscal consolidation path. After accounting for the statutory recapitalization of the RBM totaling 4.4 percent of GDP, the overall deficit reached 12.4 percent of GDP in FY2023/24. Malawi is on a path toward having one of the highest fiscal deficits relative to GDP in Sub-Saharan Africa in 2024. Moreover, the approved budget for FY2024/25 rests on optimistic revenue assumptions, and revenue underperformance may necessitate further borrowing, which could under- mine monetary policy efforts. As the domestic debt stock rises, interest payments have become the largest single expenditure item in the budget, crowding out productive investment and social spending. Debt service consumes 32 percent of revenue or 6.7 percent of GDP. Fiscal consolidation and a negotiated debt restructuring are vital to restore fiscal and external sustainability. While the government continues to pursue external debt restructuring, margins for error are becoming smaller, and the country’s reliance on high-inter- est external debt has significantly worsened its debt profile. Delays in reaching agreements with exter- nal creditors and continued fiscal slippages could derail the needed fiscal adjustment. In this context, it will be critical for bilateral and commercial creditors to reach an agreement with the authorities that ensures Malawi’s medium-term debt sustainability. The recently signed supplemental loan agreement to restructure US$ 206 million of outstanding debt to China is an important step in this direction. Fiscal imbalances weaken the ability of monetary policy to mitigate inflationary pressures, though in recent months there have been improvements in bond markets sentiment. The RBM has raised the policy rate by 200 basis points to 26 percent and increased liquidity reserve requirements to con- tain second-round inflationary effects following the devaluation in November 2023. However, money growth remained elevated at 47 percent year-on-year in April, driven in part by RBM financing of the fiscal deficit. The limited impact of higher policy rates on monetary and external imbalances reflects the extent to which high fiscal deficits diminish the effectiveness of monetary policy. Recent data show- ing a decline in monetary financing and improved bond market sentiment may herald a gradual shift in these dynamics. While Malawi’s banking sector has maintained solid capital and liquidity positions, its main role as a financial intermediator for investment has weakened. Driven by a significant increase in domes- tic borrowing by the public sector, almost 80 percent of the banking system’s total credit is towards financing the fiscal deficit. The resulting crowding out of private investment has negative long-term implications for growth and job creation. Overview 11 A sustained recovery requires urgently implementing planned reforms Addressing Malawi’s difficult economic situation requires a combination of immediate emergen- cy-response efforts and the implementation of structural reforms. While expected GDP growth for 2024 is higher than in 2022 and 2023, per capita GDP will likely experience its third consecutive contrac- tion in 2024. Growth could improve if the winter cropping season boosts agricultural output beyond current expectations. Other potential upside risks include rapid progress on debt restructuring, the accelerated development of the mining sector, and an increase in grants to ease fiscal pressures. However, downside risks continue to dominate the outlook. The impact of climate-related shocks during the current El Niño year could be larger than anticipated, while fiscal slippages, delays in debt restructuring, or the slow implementation of public financial management reforms could further in- crease macro-fiscal instability. The continued lack of foreign-exchange availability could result in short- ages of critical imports, which would reduce economic activity. The coming months will be critical to ensure that planned macroeconomic reforms are implemented and that the external and fiscal adjustment process remains on track. At the end of 2023, the govern- ment reached an agreement with the IMF on a four-year program under the Extended Credit Facility (ECF), and the resumption of budget support from the World Bank and African Development Bank will support important reforms designed to accelerate long-term growth. These achievements have bolstered confidence in the reform process, but success is far from assured. Rebalancing the economy and enabling faster, more inclusive growth, while strengthening resilience against shocks will require accelerating reform efforts. The 19th edition of the Malawi Economic Monitor (MEM) outlines urgent policy measures required to stabilize the economy, protect vulnerable households, and enhance long-term growth (Table O.1). Its key recommendations focus on: i) Restoring macroeconomic stability: Planned macro-fiscal reforms must be implemented and sus- tained to achieve fiscal consolidation, ensure the success of external debt restructuring, and con- tain the growth of domestic borrowing. Exchange-rate flexibility will be vital to support reserve accumulation, while controlling inflation will hinge on both addressing supply-side factors and limiting the growth of the money supply. ii) Bolstering food security, building resilience and protecting the poor: Given the food deficit in the upcoming lean season, it will be essential to import maize to alleviate food insecurity while also advancing policy measures to build resilience, including the implementation of the Disaster Risk Management Act. As described in the Special Topic of this edition of the MEM, the existing social protection infrastructure must be effectively leveraged to provide targeted and adaptable sup- port to poor and vulnerable households. iii) Strengthening productive capacity and diversifying exports: With climate-induced natural disas- ters and extreme weather events likely to intensify, promoting sustainable farming practices and investing in irrigation systems will be essential to build resilience. Reforming the system of price controls will be necessary to alleviate distortions that discourage production and exports. Finally, given the government’s limited resources, public investments must focus on the most produc- tive development projects and must be built around a carefully considered cost-benefit analysis. Overview 12 TABLE O.1  Priority policy areas and key actions 1. Restoring macroeconomic stability Meet ECF-supported fiscal targets by exerting greater control over public spending and Adhere to fiscal targets ensuring revenue forecasts are supported by credible tax policy and administration Short measures. Moving toward debt Accelerate restructuring negotiations with external creditors, while limiting domestic Medium sustainability borrowing in line with targets Consistently implement exchange-rate reforms announced in the November 2023 RBM Increase foreign-exchange circular by enabling authorized dealer banks to set rates, increasing the frequency Short reserves of auctions and reducing net sales to the market. Maintain a tight monetary stance and refrain from further monetary financing of the fiscal Control inflation Medium deficit. Bolstering food security, building resilience, 2.  and protecting poor households Use the limited funds available for disaster response to import maize and mitigate Import maize Short the risk of severe food insecurity. Implement key policy measures to build resilience, including through a new Social Prepare for future disasters Medium Protection Policy and implementation of the Disaster Risk Management Act. Leverage social protection Use existing social protection infrastructure to deliver government services to poor Medium systems and vulnerable households in a targeted and adaptable way. Increasing production 3.  and exports Make agriculture more Draw lessons from the El Niño-induced drought to encourage more resilient farming prac- Medium resilient and adaptive tices and develop sustainable irrigation systems. Focus public investment on Prioritize investment projects that are shown to generate the highest economic returns and Short the most productive projects ensure that all PSIP projects are subject to rigorous screening. Frequently update administrative prices to reflect market conditions (e.g. for fuel) and phase Reform price controls Short out those that have no market-determined component (e.g. for timber). Initiate Strengthen Sustain Investing in adaptive safety nets to protect poor households from shocks Malawi is exceptionally vulnerable to climate change and other shocks, with the world’s highest incidence of extreme dry events since 1980. Over the last five years, extreme weather events such as cyclones, floods, and droughts, combined with weather-related cholera outbreaks, have inflicted immense social and economic damage. These disasters have compounded the impact of the COVID-19 pandemic and prolonged macroeconomic instability, with significant negative effects on agricultural output, housing and living conditions, purchasing power, and food security. Even transitory shocks can significantly exacerbate rural poverty, as an estimated 40 percent of nonpoor rural households are highly vulnerable to poverty. A lack of savings and other coping mechanisms increases the burden of climate-related shocks. For every three Malawians who escaped poverty between 2010 and 2019, four others fell into poverty due Overview 13 to weather-related shocks. Malawi’s social protection system, the focus of this MEM’s Special Topic, is the country’s main policy framework for building long-term resilience to climate and weather-related shocks at the household level. The social protection system has evolved dramatically over the last two decades. Beginning as a col- lection of fragmented, small, and exclusively donor-financed initiatives, the social protection system is now a coherent set of programs, some of which cover large sections of the population. The system is centrally coordinated, with programs implemented jointly by the central and local governments, and it is supported by a well-functioning and swiftly expanding digital infrastructure. While Malawi’s social protection system has played a key role in shielding households from the impacts of recent shocks, further efforts will be needed to ensure that it can meet the challenges presented by rapid population growth and the intensifying effects of climate change. In recent years, investments in improving the social protection system have highlighted its capacity to protect a larger share of households more effectively against a broader range of shocks. Beyond providing immediate relief to households in a crisis, Malawi’s social protection system is becoming a key policy tool for building resilience among poor and vulnerable households and among the com- munities most affected by climate shocks. The main components of the country’s increasingly sophis- ticated adaptive social protection system include: (i) comprehensive programs; (ii) innovative digital infrastructure and delivery mechanisms; and (iii) a cutting-edge policy and programmatic framework that allows for a rapid response to shocks. Implemented under the umbrella of the Social Support for Resilient Livelihoods Project (SSRLP), and with the support of the recently established Malawi Social Protection Multi-Donor Trust Fund (MDTF), the social protection system’s three core programs are: 1. The Social Cash Transfer Program (SCTP), Mtukula Pakhomo, which provides unconditional financial support to the most vulnerable and extremely poor households with the objective of lifting them out of poverty while building human capital at the household level. 2. The Climate Smart Enhanced Public Works Program (CS-EPWP), Mbwezera Chilengedwe, which provides income support and strengthens food security among the poorest households while creating durable, climate-resilient community-owned assets. 3. The Livelihoods Support Program, which promotes economic opportunities through a “cash plus” approach designed to enhance the skill level, nutritional profile, and financial inclusion of households eligible for safety-net programs. These core programs are supported by innovative digital infrastructure and delivery mechanisms, including: • The Unified Beneficiary Registry (UBR), a rapidly expanding centralized digital platform that ena- bles the targeting of poor and vulnerable households across different programs. The UBR currently includes demographic and socioeconomic information for 3.9 million households (about 16 mil- lion individuals or approximately 77 percent of the total population). As the UBR plays a central role in targeting social protection benefits, the government can monitor which programs and ser- vices benefit various households and identify redundancies across programs. • Digital payments, the uptake of which has increased significantly over the last years. Over 440,000 households across 10 districts receive benefits or wages electronically. The use of digital payments is contributing to the efficient and timely delivery of benefits, reducing the delays, errors, and fraud typically associated with manual processes. Digital payments have enabled rapid transfers during emergencies, including the COVID-19 pandemic, as well as recent cyclones and droughts. Overview 14 Over the last four years, the policy and programmatic framework has been adapted to make Malawi’s social protection system more responsive and better able to support households in the face of cli- mate shocks. • A comprehensive package of earmarked contingent resources augmented by parametric risk insurance coverage is available to quickly finance emergency programs. By earmarking contin- gency funds to be used in response to shocks and by establishing a sovereign drought-related insur- ance policy triggered under predetermined conditions, Malawi in effect pre-emptively finances emergency programs. • The “Scalable Safety Nets” mechanism provides cash to vulnerable households following a drought. Leveraging the UBR data, and building on the SSRLP’s core programs, the government can quickly identify and provide support to beneficiary and non-beneficiary households that are affected by droughts. By leveraging the programs, systems, and policy framework described above, Malawi was able to respond to recent shocks more effectively than many regional peers. • The first major shock-responsive cash transfer program was the COVID-19 Urban Cash Initiative (CUCI). The program was also Malawi’s first cash transfer targeting urban areas. Building on the targeting methodology and implementation arrangements of SCTP, the intervention used a mix of geographic and household-level characteristics to rapidly identify 199,000 households in Lilongwe, Blantyre, Zomba, and Mzuzu and extended cash support equivalent to the monthly minimum wage for three months. • In response to the 2019 floods caused by Cyclone Ida, SCTP scaled up its support by providing top-ups to 31,587 SCTP beneficiary households affected by the flooding in five districts. • Shortly after Cyclone Freddy hit Malawi in March 2023, the government approved the Early Recovery and Food Insecurity Response. By March 2024, close to 195,000 SCTP and CS-EPWP ben- eficiaries across nine districts had received MK 150,000 to support their recovery. • In March 2024, the government implemented the Urban Price Shock Emergency Response intervention to protect poor and vulnerable urban households from the impacts of the cur- rency devaluation and rising inflation. Building once again on the SCTP, the measure provided support to about 105,000 households in Blantyre, Lilongwe, Mzuzu, and Zomba. Despite these achievements, institutional fragmentation remains a challenge. The creation of the MDTF marked a significant step toward improving donor coordination, but the social protection sector remains divided among several different line ministries tasked with various aspects of program imple- mentation, which complicates coordination. The policy framework is also incomplete. The National Social Protection Policy has yet to be approved, and there is no sustainable financing strategy for the sector. The budget for social protection remains low, with donors providing over 95 percent of its resources.1 The country’s severe macro-fiscal imbal- ances will continue to inhibit the allocation of additional domestic resources to the sector, at least in the near term. The policy uncertainty facing the sector, and the lack of a clear financing plan both for the system as a whole and for existing programs beyond a five-year horizon, makes it difficult to estab- lish feasible long-term objectives, including goals for strengthening climate resilience. 1. This figure does not include the budget for the Affordable Inputs Program. Overview 15 The MEM Special Topic highlights sweeping improvements in the performance of Malawi’s social protection system, including cutting-edge innovations in climate adaptation and household-level support. Further reforms to the sector should emphasize sustainable financing and prioritize the pro- gressive expansion of coverage and benefit levels. As climate risks continue to intensify, Malawi will increasingly face multiple successive and overlapping shocks. Greater investment in social protection, building on the strong foundations laid over the last two decades, will enable Malawi to respond swiftly and effectively to a more volatile global environment.  1 ECONOMIC DEVELOPMENTS 17 1.1 GLOBAL AND REGIONAL CONTEXT Global growth conditions have remained steady despite challenges Global growth has proven surprisingly robust, and inflation has begun to decline (Figure 1.1). To con- tain the post-pandemic surge in inflation, central banks across the world hiked interest rates (Figure 1.2). Tightening global financial conditions have raised concerns that more stable prices may come at the cost of economic output and could even precipitate a global recession. However, growth has remained robust in most major economies, especially those that implemented aggressive stimulus spending, while pandemic-era savings have helped shore up consumption. The timing of a prospective loosening cycle remains uncertain amid tight labor markets and expansionary fiscal policy in many advanced econo- mies, and central banks remain vigilant against resurgent inflation.2 The growth trajectories among high-income countries and emerging markets and developing economies (EMDEs) continue to diverge. FIGURE 1.1  Global growth has held up despite simultaneous FIGURE 1.2  Interest rate cuts have recently started monetary tightening, and inflation is declining exceeding rate hikes Real GDP growth and inflation Number of central banks increasing and decreasing policy rates by month 20 30 20 15 10 Percent 10 0 −10 5 −20 0 2021 2022 2023 2024e 2025f −30 07 19 11/ 9 03 19 07 20 11/ 0 03 0 07 21 11/ 1 03 21 07 22 11/ 2 03 2 07 23 11/ 3 03 23 24 2 2 2 2 1 2 2 /20 /20 20 /20 /20 20 /20 /20 20 /20 /20 20 /20 /20 /20 20 Real GDP growth: World EMDEs SSA 03 Inflation: World EMDEs SSA Rate rises Rate drops Source: IMF WEO 04/2024. Note: e indicates estimate, f indicates forecast. Source: World Bank based on Bank for International Settlement data. The effects of El Niño on global grain yields have resulted in abundant harvests in some countries and severe droughts in others, heightening the risk of food insecurity in Malawi and across the Southern African region. El Niño is a climate phenomenon characterized by the periodic warming of surface tem- peratures in the central and eastern Pacific Ocean, which significantly impacts global weather patterns 2. Some countries that raised rates aggressively in 2021 have already begun loosening their monetary stance as inflation has slowed, including Brazil, Colombia, Hungary, among others. 1. Economic Developments 18 and economic activity. While the El Niño phenomenon is associated with drier weather in Southern Africa, Central America, and East Asia, it tends to boost rainfall and thus crop yields among some of the most productive cereal producers in North America, Eastern Europe, Central Asia, and East Africa. However, redistributing surplus harvests to those in deficit regions poses a challenge. The number of people worldwide in need of food assistance has increased due to conflicts, and the resources availa- ble to relief agencies like the World Food Programme (WFP) are stretched thin. In 2023, WFP reported a funding gap of 60 percent against its operational requirements (WFP 2023). While GDP growth in Sub-Saharan Africa in 2023 was consistent with global trends, rapid popula- tion growth continued to undercut gains in per capita income. Sub-Saharan Africa is the only region where fertility rates remain substantially above replacement levels. An average population growth rate of 2.6 percent reduced real per capita GDP growth to just 0.8 percent in 2023, the lowest rate of any region. Moreover, a significant share of growth is concentrated in just a few economies, with Nigeria alone accounting for more than one-fifth of the region's GDP growth. Due to high levels of inequality, economic growth has had a weaker impact on poverty in Sub-Saharan Africa than in other regions. In Sub-Saharan Africa, a 1 percent increase in per capita GDP is associ- ated with a 1 percent decrease in poverty, compared to a 2.5 percent decrease in the rest of the world (World Bank 2024). The link between growth and poverty reduction is especially tenuous in southern Africa, which includes seven of the world’s ten most unequal countries.3 Low tax revenues, regressive tax structures, poorly targeted subsidies, and limited social assistance programs all perpetuate inequality. Malawi is set to have the weakest macroeconomic funda- FIGURE 1.3  Malawi's economy continues to lag mentals and experience the smallest improvement in liv- the performance of its neighbors' ing standards among its neighbors for the foreseeable fu- Real per capita GDP growth in Malawi and among its neighbors ture. In Zambia, the government continues to stabilize the 6 economy through fiscal consolidation and debt restructuring. Mozambique’s economy is growing steadily, driven by a boom- 4 ing mining sector, while the adoption of a single civil service 2 salary scale has contributed to an ongoing fiscal adjustment. Tanzania continues to have strong macroeconomic funda- Percent 0 mentals, though a shortage of foreign exchange prompted a 10 percent depreciation of the shilling against the US dollar −2 between January and April 2024. Malawi, by contrast, contin- ues to have the weakest macroeconomic fundamentals among −4 these countries, with only modest and inconsistent efforts at −6 reform (Figure 1.3). In 2023, it had the highest inflation rate 2019 2020 2021 2022 2023 2024 2025 among its neighbors, the highest fiscal deficit, the second high- Malawi Mozambique Tanzania Zambia est debt-to-GDP ratio, the second widest current-account defi- cit, and the lowest real per capita growth rate. Source: World Bank Macro Poverty Outlook (MPO) (4/2024). 3. Inequality is measured by the Gini coefficient inequality index. 19 1.2 RECENT ECONOMIC DEVELOPMENTS Economic growth failed to meet expectations in 2023 and will likely remain subdued in 2024 In 2023, economic growth failed to keep pace with population growth, resulting in a decline in per capita GDP. Compounding its longstanding development challenges, Malawi entered a comprehensive macroeconomic crisis in 2020 (World Bank 2023a). Wide fiscal and current-account deficits, unsustain- able debt dynamics, and price instability all have contributed to weak growth. The resumption of electricity production at FIGURE 1.4  Growth for 2024 is expected to increase relative the Kapichira hydroelectric plant realigned national supply to previous years but is still expected to be lower than antici- with current demand levels and contributed to a slight accel- pated due to the impacts of the drought on agriculture GDP eration in economic growth, which rose from 0.9 percent in Real GDP growth in Malawi across sectors and across forecast publication dates 2022 to 1.5 percent in 2023 (Figure 1.4). However, lack of pro- 6 ductive inputs and the impact of Tropical Cyclone Freddy in 2023 continue to constrain a broad-based recovery. 4 Percent While macroeconomic reforms have increased the medi- 2 um-term potential growth rate, a prolonged dry spell is al- ready affecting agricultural output and will likely constrain 0 growth in 2024. In addition to continued macro-fiscal chal- lenges, spillovers from the contraction in the agriculture sec- −2 2021 2022 2023 2024 2025 tor reduce the availability of inputs in industrial subsectors. Agriculture Industry Services GDP Growth Output growth in services is expected to be broadly in line with population growth and will make only a modest contri- Source: World Bank MPO (April 2024 or indicated publication date). bution to economic activity. In per capita terms, GDP growth is expected to contract for a third consecutive year. FIGURE 1.5  Malawi has experienced its third consecutive decline in annual maize production in 2023 El Niño-induced droughts led to weak harvests in many National official maize production estimates by round and irrigation status parts of the country (Figure 1.5). As was expected prior to the 5 farming season (World Bank 2023b), drought conditions and 4 crop losses were especially severe in the southern and east- Metric ton, Million ern parts of the country. Second-round production estimates, 3 which are typically close to final estimates, show a 16.6 per- 2 cent reduction in maize harvests compared to 2022/23. With 1 an expected maize harvest of 2.9 million metric tons, this rep- resents a shortfall relative to the national requirements of ap- 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 proximately 3.5 million metric tons. There are also likely to be a lower millet and sorghum harvest, a 12.1 percent reduction in Second Round Total Maize Production Estimates Final Total Maize Production Estimates groundnuts, and a 24 percent reduction in soybean production. Final Irrigated Smallholder Maize Production Estimates Rice (+11.6 percent) and cassava (-3.8 percent) are the only im- portant staples not to experience double-digit crop losses, as Source: Ministry of Agriculture. 1. Economic Developments 20 they are less vulnerable to drought, and their production is concentrated in northern Malawi. In this context, reducing the government budget for input subsidies provided through the Affordable Inputs Programme (AIP) from an estimated MK 151 billion in FY23 to MK 103 billion in FY24 was a prudent fiscal choice, as drought conditions make it more difficult to convert subsidized fertilizer into increased yields (Box 1.1). Crop losses are a major channel through which climate change affects the Malawian econo- my (World Bank 2022a). However, unless additional resources are devoted to strengthening climate resilience, climate change could reduce Malawi’s economic output by as much as 20 percent by 2040. BOX 1.1  Further AIP reforms can strengthen climate resilience Achieving sustained agricultural growth and rural transformation sup-optimal targeting and the greater significance of other fac- in Malawi will require systemic reforms to current agricultural tors, like weather. support programs to increase the efficiency and effectiveness of Recognizing these deficiencies, the government has launched public spending, improve productivity, encourage diversification, an effort to reform the AIP to reduce costs and improve target- and promote sustainable, climate-resilient production practices. ing. The government is evaluating the effectiveness and effi- Malawi’s AIP, which subsidizes maize seed, fertilizer, and other ciency of its agricultural policies and expenditures to strengthen agricultural inputs, has come at a high fiscal cost while doing lit- climate resilience, productivity, and commercialization. Through tle to enhance food security, climate resilience, or productivity. a pilot program undertaken as part of the Malawi Food Systems Instead, the program has trapped many rural households in pov- Resilience Program, the World Bank is supporting the design, erty by perpetuating a maize-based agricultural system and dis- implementation, and assessment of alternative input-subsidy couraging responsible land management. An estimated 16 per- schemes designed to generate greater value for money while cent of the agricultural households currently targeted by AIP accelerating the transition towards sustainable food systems. are not economically productive and sell subsidized fertilizer for Particular attention is being devoted to improving beneficiary cash to meet their basic needs. targeting and promoting private-sector engagement in input pro- The AIP consumes about 40 percent of the agricultural sector’s curement and distribution. The new interventions will leverage limited budget, reducing the scope for productive investments alternate means of supporting food security with a focus on agri- in irrigation, research, extension services, skills development, cultural commercialization and climate resilience, improving the and soil and water conservation. The program also consumes a impact of AIP funds going forward. Support will also be provided large share of available foreign exchange. Like previous agricul- to enhance the institutional capacity of the Policy and Planning tural subsidy policies, the AIP has largely failed to stimulate the Department of the Ministry of Agriculture to identify, track, and agricultural transformation necessary to accelerate economic evaluate public expenditures, determine whether public policies growth and job creation, and public spending on the program is are aligned with strategic development objectives, and recom- only weakly correlated with total maize production, due both to mend and implement appropriate reforms. FIGURE B1.1.1  Increased spending on fertilizer subsidies does not necessarily lead to increased maize production Subsidy spending and maize production 280 6 240 4 200 Metric ton, Million US$, Million 160 2 120 80 0 40 0 −2 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Total subsidy Annual maize requirement (right scale) Maize harvest (right scale) Source: World Bank 2023b. The success of Malawi’s El Niño response hinges on timely action and effective prioritization. Following the declaration of a state of emergency by President Lazarus Chakwera, the Department of Disaster Management Affairs (DODMA) published an appeal for US$447 million in emergency support. While the government was able to mobilize US$265 million in response to the last El Niño-related drought in 2016/17 (Duchoslav et al. 2024), at the time the government’s finances were more solvent 1. Economic Developments 21 and international assistance was more forthcoming. The US$57.6 million grant provided by the World Bank in April 2024, which the government can use immediately and with significant flexibility, may ul- timately constitute a large share of external funds available for the current response. To minimize suf- fering and prevent the loss of human capital, DODMA will need to prioritize its response activities care- fully to address the food-security crisis. Given the acute lack of grain in the country and the limited success of increasing irrigated maize production in recent years, grain imports are urgently needed, and given the limited stocks available in the region, most will likely be sourced from overseas. Distributing grain nationwide before the onset of the 2024/25 lean season while preempting shortages in neighboring markets due to the FIGURE 1.6  Food insecurity is already worse than regional nature of the drought requires rapid procurement. in previous years Mean Household Hunger Scale Food insecurity in Malawi is highly seasonal and typically 2.4 peaks in January (Figure 1.6). Indicators of the prevalence and severity of food insecurity were already higher towards the end 2.0 of 2023 than in either 2022 or 2021. Data from the first quar- 1.6 ter of 2024 show a troubling increase in food insecurity, which reached its highest level in three years. The new assessment 1.2 of the Malawi Vulnerability Assessment Committee estimates 0.8 that the number of food-insecure Malawians will increase to 5.7 million in the coming lean season, compared to 4.4 million 0.4 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec in 2023/24. The production of staple foods has likely fallen be- hind national needs, and broader economic challenges have 2020 2021 2022 2023 2024 prevented many families from sourcing sufficient and nutri- Source: World Bank based on Rapid Feedback Monitoring System 2024. tious food. As a result, many families will go into the 2024/25 Note: The Household Hunger Scale is an internationally validated survey with scores lean season facing precarious food, financial, and health con- ranging from 0 (no hunger in the household) to 6 (high severe hunger) and a score above 2 indicating at least moderate hunger. It is based on six questions related to food ditions. Households also remain exceptionally reliant on food consumption and food security. These estimations are based on the Rapid Frequent markets rather than their own production (World Bank 2023b). Monitoring System. The system collects monthly household-level data to provide real- time tracking of food security, coping strategies, and shocks experienced over time, which are linked to household characteristics associated with resilience. The system now surveys approximately 5,500 households, mainly in the country’s southern region. The share of economically inactive Malawians in urban areas Estimations are based on this sample, which is representative for rural Zomba, rural Mangochi, Chiradzulu, Phalombe, Chikwawa, and Balaka throughout the survey period has increased considerably over time. In the nationally repre- beginning in 2020. Thyolo, Nsanje, Machinga, and Mulanje are represented from July sentative High Frequency Phone Survey conducted in March 2021. The urban districts of Blantyre and Zomba and the northern district of Karonga have also been added to the survey but are omitted from the estimation to ensure 2024, 3 out of 10 respondents from urban areas stated that comparability across time. they had not worked during the past week (Figure 1.7). This is a higher percentage than was observed in May 2023 and is al- FIGURE 1.7  The share of economically inactive people has most the same level observed in February 2021, one year after increased in 2024, especially in urban areas the outbreak of COVID-19. Furthermore, the share of people Share of respondents who reported not working in the past week in urban areas who are not working is double the share in ru- 35 ral areas, and the gap between rural and urban areas has wid- 30 ened over the past year. According to World Bank estimates, 25 the poverty rate measured at the international poverty line is expected to increase to 71.9 percent in 2024.4 20 Percent 15 The share of Malawians engaging in low-paid temporary la- 10 bor, known as “ganyu,” increased during 2023, but real wag- 5 es deteriorated. Ganyu, one of the main sources of income 0 among poor households (World Bank 2022b), was less availa- 09 20 12/ 0 03 20 06 21 09 21 12/ 1 03 21 06 22 09 22 12/ 2 03 2 06 23 09 23 12/ 3 03 3 24 2 2 2 2 2 2 /20 /20 /20 20 /20 /20 /20 20 /20 /20 /20 20 /20 /20 /20 20 ble in the early months of 2023 than it had been two years pri- 06 or. However, the share of Malawian households engaging in National Urban Rural ganyu surpassed 2021 levels in the final month of 2023 at 42 percent. The share of households participating in ganyu rose Source: World Bank based on High-Frequency Phone Survey 2024. 4. The international poverty line is US$2.15 in 2017 purchasing-power-parity terms or MK 656 at 2019/20 prices. 1. Economic Developments 22 from just under 20 percent in March 2023 to almost 30 percent in March 2024 (Figure 1.8). Nominal wages trended upward in 2023 and remained high in 2024, but rising prices caused real wages to de- cline. In March 2024, the average wage was MK 2,612 per day, just enough to buy 3.4 kilograms of maize at the average national price. FIGURE 1.8  Despite declining wages, rural southern Malawians are becoming more likely to engage in temporary labor a. Share of households with members engaging in ganyu labor b. Average ganyu wage, nominal and real and in kilograms of maize per day 70 3.5 10 3.0 60 8 2.5 MK per day, Thousand Kg of maize per day 2.0 6 50 Percent 1.5 4 40 1.0 2 0.5 30 0.0 0 22 22 23 23 23 23 23 23 24 24 20 /20 20 20 /20 /20 /20 /20 20 20 /20 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 11/ 01/ 11/ 01/ 09 03 05 07 09 03 2021 2023 2024 Nominal Wage Real Wage Maize Wage (right scale) Sources: World Bank calculations based on Rapid Feedback Monitoring System 2024, Reserve Bank of Malawi 2023, and IFPRI 2023. Household welfare has deteriorated over the last two years, and survey respondents are increasingly pessimistic about their future wellbeing. In May 2022, respondents from about 7 in 10 households perceived their economic situation as being worse than in the previous year. Two years later, in March 2024, the share had increased to 8 in 10 (Figure 1.9). Most Malawians are pessimistic about their future, with 7 in 10 households expecting their situation to remain the same or to worsen further. FIGURE 1.9  Most Malawians believe that their current situation is worse than it was a year ago, while 68 percent think that their future will be the same or even worse Share of respondents a. Current situation vis-à-vis the previous year b. Expected situation next year 100 100 80 80 60 60 Percent Percent 40 40 20 20 0 0 05/2022 11/2022 03/2023 12/2023 03/2024 05/2022 11/2022 03/2023 12/2023 03/2024 Better Now Same Worse Don't Know Will be better o Same Will be worse o Don't Know Source: World Bank based on High Frequency Phone Survey 2024. Many households face challenges rooted in Malawi’s difficult business climate, which is not suf- ficiently conducive to investment and entrepreneurship. As a result, the private sector is unable to produce enough high-quality jobs to sustainably improve household welfare. In the short term, many businesses must contend with rising financing costs and increased prices for key inputs, including 1. Economic Developments 23 electricity,5 water, and fuel — all of which have been negatively influenced by the deteriorating exchange rate and the declining availability of foreign exchange. In a difficult macroeconomic environment, many businesses are pessimistic about their growth prospects. The spread of digital payment systems has facilitated transaction flows, but this is one of relatively few recent innovations to have significantly improved the business climate (Box 1.2). BOX 1.2  New national electronics payment gateway will support e-commerce transactions, social cash transfers, and revenue collection Digital transaction flows in Malawi have increased, with custom- transactions that are more vulnerable to theft and fraud. Various ers increasingly turning to convenient and flexible digital payment payment methods will be supported, including credit cards, channels such as mobile banking and mobile money. Digital pay- mobile money, and digital wallets, with QR codes making the ment channels have become more popular with customers since gateway accessible to a wide clientele. The gateway will support December 2022, when Malawi launched an instant Electronic e-commerce transactions, social cash transfers, and the collec- Funds Transfer (EFT) feature to enable real-time processing tion of tax and non-tax revenue:  of digital transactions. Although the volume of transactions in • E-commerce: The gateway will facilitate person-to-person, Malawi’s Interbank Transfer and Settlement System (MITASS) fell person-to-business, and business-to-business transactions, by 7.7 percent between 2022 and 2023, the total value of trans- enabling individuals and firms to do business safely and con- actions increased by 84.5 percent. Activity in all three interbank veniently online. Businesses will have access to new markets, transfer and settlement channels — checks, large-value transac- customers, and sources of liquidity, as well as the capacity to tions, and EFT payments — declined in volume but increased in track sales and customer interactions more efficiently.  value. Similarly, the volume of cash withdrawals is slowing, due in part to a reduction in the number of ATM transactions. MITASS • Social cash transfers: Financial institutions and social assis- flows account for less than 5 percent of total transaction vol- tance programs will be able to securely share payment data umes, while digital financial services (DFS) transactions make up through the gateway, enhancing the efficiency of their oper- over 95 percent. The volume of retail DFS transactions increased ations by improving targeting and reducing administrative by 31.2 percent in 2022 and by 51.8 percent in 2023. Point-of- costs. Increased accountability and oversight will also help sale transactions, internet banking, and mobile-money services reduce fraud, as all beneficiaries will be required to show contributed the most to the overall growth of DFS transactions, proof of identity. increasing by 67.9 percent, 31.8 percent, and 31.0 percent, respec- • Government revenue: Using the gateway, citizens will be able tively. Mobile money remains the most popular and widely used to make tax and non-tax payments and receive funds securely service, accounting for the majority of all transactions in 2023. and reliably, without the need for paper forms and manual To facilitate the continued uptake of digital financial services, the calculations. The government will have real-time access to government is establishing a national electronic payment gate- payment data, allowing it to better monitor cash flows, detect way (NePG) with support from the World Bank. With robust secu- fraud, and identify discrepancies in payments. As well as pro- rity features such as encryption and fraud-prevention mech- viding a secure platform for tax payments, the gateway will anisms, the payment gateway will make online transactions reduce opportunities for fraud and corruption among institu- seamless, secure, and convenient, eliminating the need for cash tions that collect non-tax revenue. Source: RBM 2023. The government has identified three priority sectors — agriculture, tourism, and mining . While agri- culture is set to contract in 2024, tourism has performed well, with a 23 percent increase in air-pas- senger arrivals in the 12 months to March 2024. However, Malawi still received 8.0 percent fewer air passengers between April 2023 and March 2024 than it did in the immediate pre-COVID period (April 2019 – March 2020). Among Southern African Development Community (SADC) members with availa- ble data, the tourism sectors in only three countries (Namibia, Zimbabwe, and Botswana) achieved pos- itive growth in the same period, and only three countries (Tanzania, Mozambique, and Madagascar) experienced a larger contraction than Malawi relative to the pre-COVID period. Mining holds consid- erable medium-term potential (World Bank 2023b), but the largest projects in the pipeline have yet to start production, though progress is being made in finalizing negotiations. 5. An equivalent 51 percent increase for private customers was initially suspended until April 2024, but as of June 2024, the adjust- ment had not occurred. 1. Economic Developments 24 Foreign-exchange inflows continue to fall short of demand Malawi’s efforts to shore up the balance of payments have been modest and uneven. With interna- tional fuel and fertilizer prices stabilizing and demand for Malawi’s key exports remaining strong, the country’s terms of trade have improved and now exceed pre-pandemic levels (Figure 1.10). Nevertheless, financing imports has required the continued sale of foreign exchange, mainly from project loans and grants from external partners. As a result, imports declined by just 2 percent year-on-year during the 12 months ending in March 2024 (Figure 1.11). Imports contracted further in the four months follow- ing the depreciation of the kwacha, decreasing by 11 percent year-on-year (Figure 1.12). This trend was driven by a sharp decline in imports of medical and pharmaceutical supplies (-US$41 million) and fer- tilizer (-US$31 million), which had been procured earlier in the year. Consumer-goods imports have declined more modestly, due largely to a drop in price rather than volume. Key consumer goods include plastics, paper, printed products, and textiles (-US$21 million in value, +14 percent in tonnage), fuel (-US$10 million in value, +9 percent in liters), and vehicles (-US$6 million in value, +5 percent in units). FIGURE 1.10  Malawi’s terms of trade have improved… FIGURE 1.11  …but imports continue to exceed exports Commodity terms-of-trade index (January 2019 =100) Malawi’s monthly exports, imports and trade balance (seasonally adjusted) 150 200 140 100 130 0 US$, Million 120 −100 110 −200 100 −300 −400 90 −500 80 04 1 07 1 10/ 1 01/ 1 04 2 07 2 10/ 2 01/ 2 04 3 07 3 23 01/ 3 04 4 24 2 2 2 2 2 2 2 2 2 2 2 2 70 20 /20 /20 20 20 /20 /20 20 20 /20 /20 20 20 /20 01/ 10/ 05 19 09 19 01/ 19 05 20 09 20 01/ 0 05 21 09 21 01/ 21 05 22 09 22 01/ 2 05 23 09 23 01/ 3 24 2 2 2 20 /20 /20 20 /20 /20 20 /20 /20 20 /20 /20 20 20 /20 /20 Imports Exports Trade Balance 01/ Source: IMF Commodity Terms of Trade. Source: World Bank based on NSO and RBM data. The past 12 months have been a strong year for the tobacco FIGURE 1.12  Since the devaluation of the kwacha in sector by recent standards, though Malawi’s continued reli- November 2023, most imports have declined in value terms ance on tobacco exports results in volatility of export pro- 12/2023 – 03/2024 year-on-year change in merchandise imports by product category ceeds. Over the past decade, tobacco exports have brought in Medical supplies and pharma approximately US$458 million per year and contributed 46 per- Fertilizer cent to official merchandise exports. After falling to US$343 Plastics, paper, printed products, and textiles Machinery million in the 12 months to March 2023, the nominal value Fuel of tobacco exports rebounded to historical averages in the 12 Fats, cereals and soap months to March 2024, reaching US$428 million. Larger export Vehicles Iron, steel, and cement volumes and rising prices both contributed to the recovery. Other However, export concentration remains a challenge as fluctu- −50 −40 −30 −20 −10 0 10 20 ations in global demand or prices result in significant volatility. Official non-tobacco exports decreased by 4 percent, as prices US$, Million for macadamia nuts fell along with groundnut export volumes, Source: World Bank based on NSO data. and rising exports of pulses and sugar were unable to compen- sate. Tobacco has continued to constitute 45 percent of merchandise exports in the past 12 months, unchanged from historical averages. Between 2013 and 2023, Malawi’s population grew by 28 percent, while imports rose by 12 percent, underscoring the long-term pressure on the balance of payments. Malawi's real exchange rate has appreciated since the start of 2024, but foreign-exchange liquid- ity has remained low. After the rapid depreciation that followed the devaluation of the kwacha in November 2023, the real exchange rate appreciated again since the start of 2024 (Figure 1.13). Inflation 1. Economic Developments 25 in excess of 30 percent, coupled with a stable official exchange FIGURE 1.13  After a substantial depreciation in November, rate, has made it challenging to increase the supply of for- Malawi’s real exchange rate is appreciating again eign exchange. Banks, exporters, and investors continue to Real effective exchange rate (2012=100) be reluctant to convert their foreign-exchange holdings into 110 kwacha. There are many factors that could explain this, in- cluding on the supply side (uncertainty about being able to ac- 100 cess foreign exchange holdings when needed) as well as the higher rates offered in informal parallel markets. As a result, 90 foreign-exchange liquidity among Malawian banks has been stagnant in recent months and foreign-exchange sales to au- 80 thorized dealer banks by the RBM since early 2023 have been unable to satisfy demand (Figure 1.14). Cumulatively, the RBM 70 has sold an additional US$1.1 billion to banks in the past five 06 18 18 04 18 09 19 02 19 07 0 20 05 0 10/ 1 03 21 08 22 01/ 2 06 3 11/ 3 04 23 24 years (Figure 1.15). Sustaining ongoing efforts by the RBM to 2 2 2 2 2 2 /20 20 /20 /20 20 /20 20 /20 /20 20 /20 20 /20 /20 /20 20 01/ 11/ 12/ significantly reduce sales of foreign exchange to the market will be critical to rebuild official reserves. Source: IMF International Finance Statistics. FIGURE 1.14  Foreign-exchange liquidity remains very low Weekly foreign-exchange purchases, sales, and trends in total market liquidity 180 160 140 120 US$, Million 100 100 80 60 40 20 0 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19 20 20 21 21 22 22 23 23 24 24 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 01/ 01/ 01/ 01/ 01/ 01/ 01/ 01/ 01/ 01/ 01/ 01/ 01/ 07 01/ 07 07 07 07 07 07 07 07 07 07 07 07 07 Purchases Sales Linear Regression Fit Source: World Bank based on RBM data. Fuel imports are consuming an increasing share of Malawi’s FIGURE 1.15  Substantial foreign-exchange sales were not foreign-exchange reserves. Despite historically low fuel able to meet market demand prices, the share of fuel in total imports increased in 2020 Cumulative RBM net foreign-exchange sales to authorized dealer banks and then climbed rapidly as fuel prices rose amid rebound- 200 ing demand and heightened geopolitical instability (Figure 0 1.16). Malawi has also continued to import large amounts −200 of diesel for electricity generation. In 2022, fuel accounted US$, Million −400 for 18 percent of total merchandise imports. Real prices for −600 fuel on the domestic market trended downward between −800 2010 and 2020 but recently returned to their 2015 level. Fuel imports are high relative to Malawi’s per capita GDP, which −1,000 may be due in part to underpriced fuel. Lower effective tax −1,200 rates make used cars in Malawi cheaper than in peer coun- 19 19 20 20 21 21 22 22 23 23 24 24 20 /20 20 /20 20 /20 20 /20 20 /20 20 /20 01/ 01/ 01/ 01/ 01/ 01/ 07 07 07 07 07 07 tries (IMF 2023), and alternative modes of public transporta- tion are scarce. Source: World Bank based on RBM data. 1. Economic Developments 26 Malawi’s fuel pricing policies are costly and regressive. The FIGURE 1.16  As domestic fuel prices fell, the share of fuel Automatic Fuel Price Mechanism, which was developed in re- in total imports increased sponse to Malawi’s previous foreign-exchange and fuel crisis Share of fuel in merchandise imports by year and real average fuel price in 01/2022 in 2012, was designed to stabilize fuel prices while keeping 20 5 them market-reflective. However, the calculated fuel price 16 4 has long relied on the official exchange rate and on discre- MK per liter 12 3 Percent tionary pricing policies, which ultimately reflect non-com- 8 2 mercial considerations. The cost of the effective underpric- 4 1 ing of fuel — an implicit subsidy — is borne by: (i) the RBM and other parties that have historically supplied foreign ex- 0 0 change at the undervalued official exchange rate; (ii) the en- 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 ergy regulator, which is obligated to reimburse importers Fuel Share Domestic Real Fuel Price (right scale) for losses due to underpricing and which claims to have ex- hausted the financial buffers accumulated during previous Source: World Bank based on NSO and MERA data. episodes of overpricing; and (iii) parastatals and private im- porters that have accumulated large claims against the en- FIGURE 1.17  Lower real petrol prices are associated with ergy regulator. The country has also experienced occasional higher imports fuel shortages at retail outlets. The bias toward underpric- Real petrol prices in 01/2022 ing has led to an additional increase in fuel consumption. 40 Over the past 14 years, a 10 percent price decrease in the fuel price has been associated with an immediate 2.8 percent in- 30 crease in the amount of petrol consumed and a 2.1 percent in- MK, Million crease in the amount of diesel consumed (Figure 1.17).6 This 20 implicit subsidy of fuel imports also hampers Malawi’s eco- nomic development by reducing the availability of foreign 10 exchange, which reduces the supply of other imports need- ed for growth and household welfare. Recently, fuel demand 0 0 1 2 3 4 5 6 appears to have declined slightly since the increase in prices Liter, Thousand in November 2023 following the devaluation, which in turn reduced the size of the implicit subsidy. Source: World Bank based on MERA and RBM data. BOX 1.3  A new effort to develop Special Economic Zones calls for close oversight and learning lessons from past experiences In 2023, the government approved the Special Economic Zones (SEZ) economic challenges undermined the initiative, and by 2023 the Act, which aims to establish SEZs in the country. While SEZs can be number of firms had fallen to 15 (Phiri 2023). a useful tool for policy experimentation and to concentrate expensive The international experience with SEZs is mixed. On average, infrastructure in strategic areas, the international experience shows they tend to exhibit the same economic trajectory as the coun- that they require significant public investment and often reduce tax tries in which they are located. Incentive packages, relaxed own- revenue. SEZs may also fail to attract firms or investors that would not ership rules, tax breaks, and other ostensible advantages enjoyed have established operations in the country without them. by SEZ firms tend to have at best a marginal impact on their per- Malawi’s disappointing experience with SEZs in the 1990s was formance (World Bank 2017). SEZs appear to be most successful consistent with that of many other developing economies and when they address a specific market failure that cannot be allevi- underscores the extent to which the success or failure of SEZs ated nationwide. These market failures include a dearth of secure hinges on their design and implementation. Malawi’s first SEZs, land for foreign investors, limited access to power, water, and known as Export Processing Zones, were established in 1993 other infrastructure, and specific regulatory hurdles (Zeng 2021). as part of a wide-ranging effort at trade liberalization. Offering Since SEZs tend to be expensive to establish, policymakers must exemptions from constraints on capital mobility, import restric- carefully select the right location, target key constraints on doing tions, and policies favoring “indigenous” Malawian entrepre- business, appeal to industries and firms most likely to succeed in neurs, these SEZs attracted about 40 firms. However, broader the SEZ, and maximize spillovers onto the broader economy. 6. A simple autoregressive model was fitted separately for diesel and petrol based on monthly data between 01/2010 and 03/2024. The model equation is ln ln(Qt) = β0 + β1 ln (Pt) + β2 ln (Qt − 1) + εt with Q being the quantity of fuel imported and P being the price. The coefficients for β1 were -0.277 (0.083) for petrol and -0.205 (0.110) for diesel. These values are in line with estimates elsewhere (Amaglobeli et al. 2022). 1. Economic Developments 27 Malawi’s new SEZ Act of 2023 could address some key market fail- Malawi has found an experienced developer, ARISE IIP, to estab- ures. The Malawi Investment and Trade Centre (MITC) is designated lish its newest SEZ in Kanengo, Lilongwe, with financing pro- as the SEZ Authority and can grant licenses as a one-stop shop. vided by Afreximbank. However, many details of the project While foreign businesses are still unable to acquire land outright, they remain unclear, and greater transparency regarding the financial can lease land for up to 50 years from the MITC. While the SEZ Act and risk-sharing arrangements and the scale of the tax and reg- alleviates some burdensome non-tariff barriers and capital controls, ulatory exemptions granted would enable an assessment of the the tax incentives granted to SEZ firms may be overly generous. They project’s likelihood of success. Moreover, as Malawi remains in would also not necessarily attract businesses that are more focused debt distress and Afreximbank is its largest external commercial on generating profits at scale rather than limiting their tax liability. The creditor, it will be critical to ensure that ongoing negotiations on law gives officials considerable discretion to provide taxes and other medium-term debt restructuring can proceed in the context of incentives, which raises the risk that SEZ firms will receive additional this new arrangement. favorable treatment regardless of their economic contribution. Inflation has moderated slightly, but risks remain elevated Following a spike after the November 2023 devaluation, inflation has remained consistently above 30 percent, driven by a surge in food prices. Headline inflation peaked at 35.0 percent in January 2024 before edging down to 31.8 percent in March and then rising to 32.7 percent in May. Food inflation reached a high of 44.9 percent in January, led by rising maize prices, but has declined slightly to 40.7 percent in May. Non-food inflation has been somewhat lower and more stable at around 22 percent since the start of the year. Urban consumers have experienced higher overall inflation due to their greater consumption of non-food items affected by the pass-through effect of exchange-rate depreci- ation. However, the pass-through effect has been weaker than in past episodes of devaluation, due in part to more prudent monetary policies and in part to the parallel market rate already being priced in before the devaluation for many goods without price controls. The risk of a renewed surge in inflation is significant amid the rapid growth of the money supply and insufficient fiscal discipline. The RBM has tightened its stance, raising the policy rate by 200 basis points since November 2023 to 26 percent in an effort to contain second-round inflationary effects following the devaluation of the kwacha and increasing liquidity reserve requirements. The growth of money supply remained elevated at 47 percent year-on-year in April, driven by central-bank financing of the fiscal deficit (Figure 1.18). Further monetary financing of the deficit could intensify inflationary pressures, and the recent drought could cause a supply shock that increases food prices, especially for staples like maize (Figure 1.19). Recent data showing a decline in monetary financing and improved bond market sentiment may herald a gradual shift in these dynamics. FIGURE 1.18  Inflation continues to increase broadly in line FIGURE 1.19  Maize prices have been a key factor in rising with the growth of the money supply inflation Year-on-year inflation and the growth of broad money Nominal maize prices, national average and averages in Mzimba and Liwonde districts 50 1,000 40 800 600 30 MK Percent 400 20 200 10 0 04 020 07 20 10/ 20 01/ 20 04 021 07 21 10/ 21 01/ 021 04 22 07 022 10/ 22 01/ 22 04 23 07 023 10/ 23 01/ 23 04 24 24 0 /20 /20 20 /20 20 20 /20 20 20 /20 /20 /20 20 2 2 /2 /2 2 01/ 07 16 01/ 16 07 17 01/ 17 07 18 01/ 18 07 19 01/ 19 07 20 01/ 20 07 21 01/ 21 07 22 01/ 22 07 23 01/ 23 07 24 24 20 /20 20 /20 20 /20 20 /20 20 /20 20 /20 20 /20 20 /20 20 /20 Average Mzimba Liwonde 01/ Broad money growth Inflation Source: World Bank based on FAO data. Note: Data for Mzimba and Liwonde districts included as they are the northern- and Source: World Bank based on NSO and RBM data. southern-most districts in the FAO dataset. 1. Economic Developments 28 Persistent fiscal slippages jeopardize Malawi’s economic recovery The fiscal deficit for FY2023/24 significantly exceeded the levels anticipated both in the approved budget and in the mid-year revised budget. When the statutory 4.4 percent of GDP recapitalization of the RBM is included, the overall fiscal deficit reached 12.4 percent of GDP, up 2 percentage points from FY2022/23. As a result, Malawi is once again on the path toward having one of the highest fiscal deficits in Sub-Saharan Africa during the 2024 calendar year (Figure 1.20). Expenditure overruns drove the widen- ing of the deficit, with spending levels exceeding the approved budget by 10.6 percentage points of GDP due to the RBM recapitalization and overspending on the wage bill, subsidies, and other recurrent costs. Rising expenditures more than offset a strong revenue performance, as the 44 percent adjustment of the kwacha in November 2023 increased the cost of many goods and services, but also boosted customs reve- nue through higher import tax intake and by increasing effective tariff rates on price-controlled goods like fuel. Financing the deficit necessitated greater domestic borrowing from the RBM and commercial lenders. FIGURE 1.20  Malawi is again on the path to have one of the highest fiscal deficits in Sub-Saharan Africa Fiscal deficits of countries in Sub-Saharan Africa 12 8 Percent of GDP 4 0 −4 −8 −12 om o pu ia ia e Bu Sen ogo Afr o ua L Cha e iss i Eri car ur i T u Sie Rw nea ica Tan dan Ni nda o, sw ia L a Ma e d'Iv ya Es tania ga e a Ga Prín ue Co B m na Cô Ke ria Be li Ma thio e Gh ius yc ea tor es d So me ini Se Guin la Su r m, a ine uru e Ca Ga e o, n mo n Co h Su on Ve n So na al Ni s ur pia p. Ug eria nd biq c An ep. ba les Gu o Lib ica a-B nd Ma alaw ge mb cip rd ro uth Fas Ma da oir E , Th rra and Gu B eon tre é a zam bli bw a De an ial oth ng da Co ni bo bo o T M n Re zan Re ng ot ib go rki eg t n Ca wat a ut ro ge Zim hel it R s i a i M N a Afr Eq al ntr Sã Ce 2023 estimate 2024 forecast Source: World Bank 2024. Note: Deficit estimates adjusted from fiscal year to calendar year for comparability across countries. These have been updated for Malawi to include the FY2024/25 approved budget. e indicates estimate, f indicates forecast. The approved budget for FY2024/25 rests on optimistic revenue assumptions related to budget sup- port and tax collection. Total expenditures are projected to decline by 3.7 percent of GDP, while tax reforms, improvements in revenue administration, and rising budget support are expected to yield a 0.8 percentage-point increase in revenues (Figure 1.21). The budget targets a primary surplus in line with the IMF ECF program, but fiscal discipline must be strength- ened to avoid further slippages. These expectations are also FIGURE 1.21  Reduced expenditures and higher revenues subject to significant downside risks. The budget includes few are anticipated in the approved FY2024/25 budget specified sources of increased revenue beyond anticipated effi- Revenues and expenditures as a share of GDP ciency gains from the implementation of the new “Msonkho 40 Online” integrated tax-administration system. Slowing eco- nomic activity also poses a major risk to revenue projections. 30 Underperformance on the revenue side could necessitate fur- Percent 20 ther borrowing and potentially monetary financing, imped- ing efforts to rein in inflation. 10 As the domestic debt stock rises, interest payments have be- 0 20/21 21/22 2022/23 2023/24 2023/24 2024/25 come the single largest expenditure item. Successive fiscal (planned) (outturn) (planned) deficits have contributed to the sustained accumulation of Revenues Expenditures domestic debt, with outstanding balances reaching 31.9 per- cent of GDP at end-2023. Debt service consumes 32 percent of Source: World Bank based on MoFEA and IMF data. 1. Economic Developments 29 revenue (6.5 percent of GDP), narrowing the scope for productive investment and social spending. The Constituency Development Fund, which lacks the oversight mechanisms of other local-government fi- nancing instruments, and the AIP are sources of expenditure inefficiency, and the socioeconomic impact of the drought is increasing expenditure pressures. Implementing lessons learned from past projects under the Public Sector Investment Programme could help improve oversight and efficiency (Box 1.4). BOX 1.4  The importance of transparency in the prioritization of the Public Sector Investment Programme The FY2024/25 budget increased the resources allocated to the granular details on public investment projects, and since Public Sector Investment Programme (PSIP). The development FY2023/24 it has published the PSIP Document, which presents budget increased to 30 percent of total spending, a key bench- an analysis of ongoing projects, tracks their physical progress, mark for the government. However, given that the FY2024/25 and offers recommendations for addressing challenges involving PSIP contains 297 projects with a total estimated cost of MK the most costly projects. 14.5 trillion (of which MK 5.4 trillion is to be government-funded), The PSIP Document confirms that many projects face similar even the targeted MK 1.77 trillion (of which the government opti- problems. These include low readiness when they enter the port- mistically expects to cover MK 1.3 trillion) will likely not go far folio, funding and procurement delays, shortages, and escalating enough in advancing the implementation of the broader portfolio. costs. However, some projects proceed on schedule and remain Given the need to focus scarce public funds on the most effec- within budget, such as the Lilongwe Water and Sanitation tive projects, the government could leverage its increased trans- Project. Such projects should receive priority when allocating parency in the PSIP to promote effective prioritization by incor- funds, and lessons learned from their implementation could sig- porating input from the public. Starting with the FY2020/21 nificantly improve the quality of the entire PSIP portfolio. budget, the government has begun producing increasingly FIGURE B1.1.4  While some public investment projects struggle, others deliver on time and on budget Water infrastructure delivered by the Lilongwe Water and Sanitation Project Source: Government of Malawi 2023b. The government has implemented important fiscal and public financial management reforms, but these efforts have been gradual and uneven. These measures include steps to improve budget exe- cution by expanding the Integrated Financial Management Information System across the public sec- tor, enforcing adherence to quarterly expenditure allotments, and conducting regular reconciliations between banking and accounting data. However, prescribed processes are not always followed, and public investment management often suffers from weaknesses in implementation. The new budget reaffirms the government’s commitment to the controversial Lilongwe-Salima Water Project. With the government pre-financing 50 percent of the total estimated cost of MK 350 billion, the project constitutes a major explicit liability for the government. If liability-management 1. Economic Developments 30 measures are not implemented stringently, the project may also generate additional contingent liabili- ties for the government. Further policy action is urgently needed to enhance transparency and account- ability in public financial management. TABLE 1.1  Fiscal Accounts Percent of GDP 23/24 24/25 Approved Revised Budget Approved   20/21 21/22 22/23 Budget Budget Outturn Budget Revenue 14.7 14.6 15.2 14.7 17.5 19.1 21.1 Domestic Revenue 12.8 12.8 12.1 12.9 13.8 13.1 15.7 Taxes 12 12.1 11.6 12.2 12.6 12.7 15.1 Taxes on Income, Profits and Capital Gains 5.6 5.5 5.5 5.7 5.9 6.2 7.3 Taxes on Goods and Services 5.4 5.6 5 5.2 5.3 5.2 6.0 Taxes on International Trade and Transactions 1.0 1.0 1.1 1.4 1.4 1.3 1.8 Other Taxes 0 0 0 0.0 0.0 0.0 0.0 Grants 1.9 1.8 3.1 1.8 3.6 6.0 5.4 From Foreign Governments 0 0 0.2 0.1 0.1 0.0 0.3 From International Organizations 1.9 1.8 2.9 1.7 3.5 6.0 5.1 Other Revenue 0.7 0.7 0.5 0.7 1.2 0.4 0.6 Expenditure 21.5 23.2 25.7 21.8 24.9 31.5 27.8 Expense 17.8 18.5 18.6 17.0 18.7 22.4 19.6 Compensation of Employees 5.8 6 5.6 5.3 5.9 5.9 5.2 Goods and Services 3.6 3.8 3.1 3.1 3.5 3.5 3.9 Generic Goods and Services 2.2 2.2 1.9 1.9 2.1 2.2 2.3 Interest 3.6 3.3 4.6 5.3 5.4 5.0 6.7 To Non-Residents 0.2 0.2 0.3 0.2 0.5 0.3 0.4 To Residents other than the General Government 3.4 3.1 4.3 5.1 4.8 4.7 6.4 Grants 1.9 2.1 3.3 1.7 1.9 5.9 1.9 Social Benefits 2.5 3 1.9 1.4 1.7 1.7 1.7 Fertilizer Payments 1.3 1.9 1.1 0.6 0.6 0.6 0.7 Other Expenses 0.3 0.4 0.1 0.1 0.3 0.5 0.2 Acquisition of Non-Financial Assets 3.7 4.7 7 4.8 6.2 9.1 8.2 Foreign Financed 2.7 3 5.4 3.5 4.6 7.4 6.4 Domestically Financed 1.0 1.7 1.7 1.3 1.6 1.7 1.8 Fiscal Deficit –6.8 –8.6 –10.4 –7.1 –7.4 –12.4 –6.7 Primary Balance –3.2 –5.3 –5.9 –1.8 –2.1 –7.4 0.0 Net Financing 6.8 8.6 10.4 7.1 7.4 12.4 6.7 Net Incurrence of Liabilities 6.9 10.3 7 7.1 7.4 7.6 6.7 Foreign Liabilities 1 2.6 1.9 0.8 1.1 0.5 0.7 Borrowing 1 0.7 1.9 1.7 2.1 2.1 1.7 Amortization –0.4 –0.4 –0.6 –0.9 –1.0 –1.7 –1.0 Domestic Liabilities 5.9 7.7 5.1 6.3 6.3 7.0 6.0 Statistical Adjustment (underfinancing if positive) –0.1 –1.7 3.4 0.0 0.0 4.9 0.0 Source: World Bank calculations based on data from MoFEA and IMF. 1. Economic Developments 31 Debt sustainability hinges on successful restructuring and fiscal adjustment Persistently large fiscal and external deficits and the deprecation of the kwacha have pushed the debt stock to 91.3 percent of GDP. The fiscal deficit reached 12.4 percent of GDP in FY2023/24, necessitating large-scale domestic and external borrowing while the depreciation of the kwacha added approximately MK 2 trillion to the debt stock. The current account deficit has widened to more than 15 percent of GDP in recent years due to the overvaluation of the exchange rate over many years, significant explicit and implicit import subsidies, higher global prices for fuel and fertilizer and subdued export performance. Although increased grant financing provided some relief, the twin fiscal and external deficits contrib- uted to a mounting debt stock. Negative real interest rates eroded the real value of domestic debt, but this was outweighed by substantial new issuances, especially of medium-term Treasury notes (Figure 1.22). Meanwhile, the kwacha’s depreciation pushed the external debt burden to 48.5 percent of GDP, and it now exceeds the domestic debt stock of 42.8 percent of GDP. FIGURE 1.22  The share of Treasury securities in total debt is increasing Debt as a share of GDP by instrument 100 80 60 Percent 40 20 0 24 01/ 18 01/ 19 04 18 01/ 16 04 19 10/ 18 01/ 20 01/ 15 04 16 07 18 10/ 19 04 15 10/ 16 01/ 17 07 19 04 20 07 16 10/ 20 01/ 21 10/ 15 04 17 01/ 23 07 15 07 20 04 21 10/ 17 04 23 07 17 10/ 21 01/ 22 10/ 23 07 21 04 22 07 23 07 22 10/ 22 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 /20 20 20 /20 /20 01/ T-Bill T-Note Other Domestic Foreign (est) Source: World Bank based on RBM data. Malawi continues to pursue external debt restructuring, but the margin for error is narrowing. The latest World Bank Debt Sustainability Analysis confirms that the restructuring strategy — if fully implemented alongside a successful fiscal consolidation under the IMF program and complemented by increased grant financing — could restore debt sustainability over the medium term (IMF/World Bank 2023). In this context, it will be critical for bilateral and commercial creditors to reach an agreement with the authorities that ensures Malawi’s medium term debt sustainability. The recently signed sup- plemental loan agreement to restructure US$ 206 million of outstanding debt to China is an impor- tant step in this direction. There is limited flexibility to accommodate further shocks, and delays in restructuring negotiations with creditors or domestic reform slippages could derail the adjustment. External risks include a potential deterioration in the terms of trade or a further tightening of global financing conditions. While bond market sentiment appears to be improving slightly, the financing of deficits from the domestic market is becoming increasingly expensive. Domestic borrowing by the public sector has surged and accounted for almost 80 percent of total credit to the economy at end-2023 (Figure 1.23). Sovereign risk has pushed up yields on government securities, with the 364-day Treasury bill rate ex- ceeding 25 percent and the 10-year Treasury note rate reaching 35 percent in June. Despite higher rates, there is limited scope to expand domestic financing, and the share of outstanding debt held by the RBM will likely increase (Figure 1.24). In this context, fiscal consolidation and successful external debt re- structuring will be vital to restore fiscal and external sustainability. 1. Economic Developments 32 FIGURE 1.23  Increased government borrowing since 2016 FIGURE 1.24  Government borrowing is increasing from all is crowding out private-sector credit domestic sources Shares of the public and private sectors in total credit Holders of government debt 100 6 80 5 4 MK, Million 60 Percent 3 40 2 20 1 15 15 16 17 18 18 19 20 21 08 1 22 23 24 15 15 16 17 18 19 20 20 21 22 23 24 2 /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 11/ 01/ 10/ 11/ 01/ 11/ 01/ 11/ 05 07 02 09 08 02 07 03 05 09 05 02 07 05 03 05 Net Credit to Government (NCG) Credit to Private Sector Commercial Bank NCG Non-Bank NCG Government borrowing from RBM Source: World Bank based on RBM data. Source: World Bank based on RBM data. The exchange-rate spread has narrowed following the devaluation, but planned reforms to increase flexibility have yet to be fully implemented Following the kwacha’s 44 percent adjustment against the US dollar in November, the spread be- tween the official and bureau exchange rates narrowed substantially. The spread declined from a high of over 60 percent to about 10 percent at end-April (Figure 1.25). Despite significant inflows from de- velopment partners, foreign-exchange liquidity remains very low, with reserves equal to less than one month of import cover. Total reserves, including those held by authorized dealer banks, are approxi- mately 2.5 months. The RBM has struggled to step up foreign-exchange purchases and reduce sales for most of this year, but May 2024 data shows a first significant reduction of sales to the market. If sus- tained, this would be an important contributor to the accumulation of necessary reserves. FIGURE 1.25  The exchange-rate spread stabilized after the November 2023 devaluation but have since begun widening again as reserves remain low Telegraphic transfer and forex bureau cash MK/US$ rates and spreads through May 31 and gross official reserves in months of import coverage 4 2,400 RBM TT and forex bureau cash MK/US$ rates 2,000 3 Months import cover 1,600 2 1,200 800 1 400 0 0 20 20 20 20 20 20 03 1 05 1 07 1 09 1 21 01/ 1 03 2 05 2 07 2 09 2 22 22 03 3 05 3 07 3 09 3 23 23 24 05 4 24 2 2 2 2 2 2 2 2 2 2 2 2 2 2 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 01/ 11/ 11/ 01/ 11/ 01/ 01/ 11/ 03 03 05 07 09 Gross Reserves O icial TT Sell (right scale) Median Cash Sell (right scale) Source: World Bank based on RBM data. The incomplete implementation of exchange-rate reforms announced in November 2023 is a key factor in the current shortage of foreign-exchange liquidity. The RBM has kept the official exchange rate stable since the November 2023 devaluation, and some key liberalization measures announced in November 2023 have yet to be fully implemented. Rather than setting rates freely, authorized dealer 1. Economic Developments 33 banks continue to transact exclusively at the official exchange rate in the spot market. While foreign-ex- change auctions are held monthly, volumes remain very low and have so far resulted in only a single 3 percent adjustment of the exchange rate in late February 2024. Furthermore, the bureau exchange rate has become a less useful guide for assessing the market-clearing rate as the spread between the official and parallel market rates is likely higher than reported bureau rates would indicate. Monetary tightening has been insufficient to contain inflationary pressures Following the devaluation, the policy rate has been tightened further, but sustained money growth paired with continued supply constraints have undercut efforts to control inflation. Since January 2023, the Monetary Policy Committee (MPC) has increased the policy rate by a cumulative 800 basis points to 26 percent, with the most recent hike of 200 basis points occurring in February 2024. Nevertheless, the real policy rate (calculated as the difference between the nominal rate and inflation) remains nega- tive. Rates for Treasury bills, interbank rates, and base rates have all moved in lockstep with the policy rate (Figure 1.26). Despite the tighter monetary stance, continued central-bank financing of the fiscal deficit has resulted in a continuous expansion of the money supply, which is contributing to inflation. Yields on Treasury bills and notes increased over the past year in line with rising interest rates. The mounting cost of debt service further complicates fiscal management. The exchange-rate deprecia- tion, high inflation, and high levels of money growth also weakened the RBM’s balance sheet, requiring a statutory recapitalization of MK 704 billion (4.4 percent of GDP) to offset valuation losses. FIGURE 1.26  The real policy rate remains negative, but base FIGURE 1.27  …and government borrowing yields have risen lending and interbank rates have increased… substantially over the last year Government and private sector shares of total credit Treasury bill and note interest rates and yield change 50 35 700 40 30 600 30 25 500 20 Percent Basis points 10 20 400 Percent 0 15 300 −10 10 200 −20 5 100 06 2016 11/ 016 04 016 09 17 02 2017 07 018 12/ 018 05 2018 10/ 019 03 2019 08 2020 01/ 20 06 2021 11/ 021 04 2021 09 2022 02 022 07 23 12/ 023 05 2023 24 /20 /20 /20 /20 /2 /2 /2 /2 /2 2 /2 /2 / 01/ / / 0 0 91 182 364 2 3 5 7 10 Policy rate Base rate Interbank rate 364-day T-Bill day day day year year year year year Real policy rate Max lending rate 03/2023 06/2024 Yield Change (right scale) Source: World Bank based on RBM data. Note: Real policy rate calculated as difference between nominal rate and inflation. Source: World Bank based on RBM data. The financial sector remains stable, with commercial banks reporting a very strong performance in 2023 Malawi’s banking sector has maintained a solid capital and liquidity position despite the economic challenges facing the country. As of March 2024, the overall capital ratio and the tier 1 capital ratio were 22.3 percent and 20.0 percent respectively, down slightly from 25.5 percent and 22.2 percent in March 2023 but still well above the regulatory minimums of 10.0 percent and 15.0 percent (Figure 1.28). The drop in capital adequacy was mainly due to a 27.6 percent increase in private-sector credit during the period. Meanwhile, the liquidity coverage ratio rose from 56.4 percent in March 2023 to 66.2 percent. 1. Economic Developments 34 While ample liquidity is a positive sign, it reflects the concen- FIGURE 1.28  Financial stability indicators have proven tration of bank resources in short-term assets, and in particu- resilient lar government securities that are unlikely to support capi- Tier 1 capital and liquidity coverage ratios as share of total exposure and ROE as share of total equity tal investment by the private sector. As a result, the share of total loans and advances fell from 26.2 percent of total assets 70 in March 2023 to 24.6 percent in March 2024. Supported by 60 profitable government securities, the banking sector main- 50 tained an impressive return on assets (ROA), which rose from 40 Percent 5.2 percent in March 2023 to 5.6 percent in March 2024, while return on equity (ROE) increased from 39.3 percent to 47.0 per- 30 cent, the highest in southern Africa. 20 10 Credit to the private sector increased in nominal terms, by 0 28.3 percent to MK 1.22 trillion in March 2024 from MK 939.0 23 23 23 23 23 23 23 23 24 24 24 24 24 /20 /20 /20 /20 /20 20 20 20 billion in March 2023. A 51.7 percent increase in credit to the 20 /20 /20 /20 /20 10/ 11/ 12/ 01/ 05 06 07 08 09 02 03 04 05 agriculture, forestry, fishing, and a 38.3 percent increase in cred- Tier 1 Capital Liquidity ROE it to the community, social and personal services sector drove this trend (Figure 1.29). As of March 2024, these two sectors Source: World Bank staff calculations based on RBM data. accounted for a combined 57.5 percent of credit to the private sector. The community, social, and personal services sector’s FIGURE 1.29  Community, social, and personal services share in total private-sector credit rose from an average of remain the focus of private credit 28.3 percent in January 2022 to 37.5 percent in April 2024. The Lending by sector as a share of total lending share of agriculture, forestry, fishing, and hunting increased from 14.7 percent to 19.0 percent over the same period, while Agriculture, forestry, fishing & hunting the wholesale and retail trade sector’s share fell from 18.7 per- cent to 14.3 percent. The increase in the share of credit to the Manufacturing agriculture sector is encouraging, as it reflects greater financ- Wholesale and retail ing of productive activities, though the level of concentra- trade tion remains a concern. However, the steady increase in the Community, social and share of credit to the community, social, and personal servic- personal services es sector may be economically regressive if a large proportion Other sectors of those resources is devoted to consumption. Moreover, the dominance of these three sectors — which together account- 0 5 10 15 20 25 30 35 40 ed for an average of 75.0 percent of total private-sector credit Percent in the first quarter of 2024 — poses a significant risk to the fi- Average 2022 Average 2023 Average Q1 2024 nancial system, as a downturn in one or more of these sectors could strain bank balance sheets. Source: World Bank staff based on RBM data. By the end of March 2024, non-performing loans (NPLs) stood at 7.2 percent of total loans. NPLs as a ratio of gross loans declined to 7.2 percent in March 2024 from 6.3 percent in March 2023, and remained above the regulatory benchmark of 5.0 percent. While some banks have generally maintained NPL ratios below the benchmark, others have consistently registered higher NPL ratios. Despite the high NPL ratio of some banks, the regulator considers the banking sector to be resilient to risks, including default risk. Overall, as of December 2023, the rest of the financial sector remained sound. The microfinance sector, the general insurance sector, and the life insurance sector all maintained capital ratios well above the regulatory benchmarks. In the microfinance sector, some monetary financial institutions and financial cooperatives have low levels of capital adequacy, while the life insurance sector faces important risks related to the concentration of investments in government bonds and a narrow range of listed equities. 35 1.3 MEDIUM-TERM ECONOMIC OUTLOOK Malawi’s economy is in a difficult position, with macroeconomic policy choices and the recent drought worsening an already challenging situation. The approval of the ECF in November 2023 ena- bled the resumption of budget support by the World Bank and the African Development Bank, but the macroeconomic adjustment necessary for the economy to recover is proceeding slowly. Meanwhile, significant fiscal slippages, the RBM’s continued difficulty to accumulate foreign reserves, and mount- ing debt challenges cloud the outlook. Further progress on the reform agenda will only become more challenging as spending pressures related to the 2025 presidential election approaches. Malawi’s economy is projected to grow by 2.0 percent in 2024, an improvement on the past two years but below the population growth rate of 2.6 percent, leading to a contraction in per capita terms. The limit- ed availability of agricultural inputs and the impact of prolonged dry spells during the growing season are expected to reduce agricultural output. Continued liquidity challenges in foreign-exchange markets are ex- pected to continue affecting the importation of raw materials and productive inputs, constraining econom- ic activity in the industrial and services sectors. However, the implementation of planned macroeconomic and structural reforms to support private investment is expected to boost the potential growth rate to about 4 percent in the medium term, also leading to a reduction in the poverty rate. As rising prices and declining output contribute to heightened food insecurity, poverty is expected to worsen in 2024, and the share of people living below the international poverty line of US$2.15 a day is projected to rise to 71.9 percent in 2024. Headline inflation is expected to remain elevated at an average of about 30 percent in 2024. The disinflationary impact of tighter monetary policy will likely be offset by diminished agricultural out- put and continued upward pressure on food prices. In addition, further increases in energy and other utility prices in line with pricing formulas could compound inflationary pressures in 2024, and addi- tional monetary financing of the fiscal deficit poses inflationary risks. The fiscal deficit is expected to moderate to 7.0 percent of GDP, but this forecast is subject to several downside risks. Revenue is projected to reach 21.1 percent of GDP in FY2024/25, assuming the govern- ment achieves its ambitious targets for tax collection, and grants increase to 5.4 percent of GDP — the highest level in a decade. In parallel, spending is expected to moderate slightly to 27.8 percent of GDP, resulting in a fiscal deficit of 6.7 percent of GDP in FY2024/25 if buget targets are achieved. Revenue underperformance and/or overspending would widen the deficit further, adding to an already unsus- tainable public debt burden. Malawi’s economic outlook is vulnerable to numerous downside risks, but also could benefit from up- side risks materializing. The impact of El Niño-related droughts could worsen, while further fiscal slippag- es and delays in debt restructuring and public finance management reforms could increase macroeconomic instability. A failure to increase adequate foreign-exchange liquidity could result in shortages of critical im- ports, which would have negative implications for economic activity and could impact social cohesion. On the upside, an unusually successful winter cropping season could bolster agricultural output and alleviate food insecurity. Further upside risks include a swiftly negotiated debt-restructuring agreement, the fast- er-than-expected development of the mining sector, and an increase in grants (and especially on-budget grants). 1. Economic Developments 36 Policy Priorities: restoring macroeconomic stability, protecting vulnerable households against shocks, and increasing production and exports Malawi’s macroeconomic adjustment effort will face critical challenges in the coming months. Agreement on a four-year ECF-supported program at the end of 2023 was a significant milestone, but it represents the start of a reform process, not its conclusion. To rebalance the economy toward faster, more inclusive, and more resilient growth, policymakers will need to focus on advancing key structural reforms to increase investment in priority sectors, including agriculture, energy, mining, and tourism. Lessons from the early 1990s underscore the risks of failing to address macroeconomic imbalances. At that time, Malawi’s fiscal deficit steadily widened, with fiscal restraint deteriorating in the run-up to the 1994 election. Left with few options, the government resorted to monetary financing of the fiscal deficit, and between 1988 and 1993 the money supply increased by 260 percent. In 1995, inflation peaked at close to 100 percent. The result was a decade of economic stagnation that only ended following pain- ful adjustment reforms and debt relief in the early 2000s (Figure 1.30). A key lesson from this period is the importance of prioritizing fiscal discipline and addressing macroeconomic imbalances proactively. FIGURE 1.30  Recent trends echo those of the early 1990s Key economic indicators, 2018-2023 and 1988-2000 a. The fiscal deficit b. Broad-money growth 0 2,400 Year-on-year percent change 2,000 −10 1,600 Percent of GDP 1,200 −20 800 400 −30 0 1988/2018 1 2 3 4 5 6 7 8 9 10 i 2000/2030 1988/2018 1 2 3 4 5 6 7 8 9 10 i2000/2030 c. Inflation rate d. GDP per capita 100 600 Year-on-year percent change 80 500 US$, in PPP terms 400 60 300 40 200 20 100 0 0 1988/2018 1 2 3 4 5 6 7 8 9 10 i 2000/2030 1988/2018 1 2 3 4 5 6 7 8 9 10 i 2000/2030 1988–2000 2018–2023 Source: World Bank staff calculations based on WDI, MoFEA and RBM data. Urgent actions and sustained reforms are required to restore macroeconomic stability, protect the most vulnerable households, and enhance growth (Table 1.2). Key objectives include: i) Restoring macroeconomic stability: Planned macro-fiscal reforms must be fully implemented and sustained over time. Key objectives include fiscal consolidation in line with the ECF targets, pro- gress on external debt restructuring while containing the growth of domestic borrowing, accu- mulating reserves by moving forward with increased exchange-rate flexibility, and controlling inflation by limiting the growth of the money supply and refraining from further monetary financing of the fiscal deficit. 1. Economic Developments 37 ii) Bolstering food security, building resilience, and protecting poor households: Given the significant food deficit in the coming lean season relative to the national requirement, maize imports will be vital to mitigate widespread food insecurity. Meanwhile, the authorities must prepare for the next disaster by implementing the Disaster Risk Management Act along with additional policy reforms to build ex-ante resilience. As described in the MEM’s Special Topic, the government can leverage its existing social protection infrastructure to provide targeted and adaptable support to poor and vulnerable households. iii) Increasing production and exports: With climate-induced natural disasters and extreme weather events likely to intensify, promoting sustainable farming practices and investing in irrigation sys- tems will be essential to build resilience. Moreover, reforming the system of price controls will be necessary to alleviate distortions that discourage production and exports. Finally, given the government’s limited resources, public investment must focus on the most productive projects and reflect a careful analysis of likely costs and benefits. TABLE 1.2  Priority policy areas and key actions 1. Restoring macroeconomic stability Meet ECF-supported fiscal targets by exerting greater control over public spending and Adhere to fiscal targets ensuring revenue forecasts are supported by credible tax policy and administration Short measures. Moving toward debt Accelerate restructuring negotiations with external creditors, while limiting domestic Medium sustainability borrowing in line with targets. Consistently implement exchange-rate reforms announced in the November 2023 RBM Increase foreign-exchange circular by enabling authorized dealer banks to set rates, increasing the frequency Short reserves of auctions, and reducing net sales to the market. Maintain a tight monetary stance and refrain from further monetary financing of the fiscal Control inflation Medium deficit. Bolstering food security, building resilience, 2.  and protecting poor households Use the limited funds available for disaster response to import maize and mitigate Import maize Short the risk of severe food insecurity. Implement key policy measures to build resilience, including through a new Social Prepare for future disasters Medium Protection Policy and implementation of the Disaster Risk Management Act. Leverage social protection Use existing social protection infrastructure to deliver government services to poor Medium systems and vulnerable households in a targeted and adaptable way. Increasing production 3.  and exports Make agriculture more Draw lessons from the El Niño-induced drought to encourage more resilient farming prac- Medium resilient and adaptive tices and develop sustainable irrigation systems. Focus public investment on Prioritize investment projects that are shown to generate the highest economic returns and Short the most productive projects ensure that all PSIP projects are subject to rigorous screening. Frequently update administrative prices to reflect market conditions (e.g. for fuel) and phase Reform price controls Short out those that have no market-determined component (e.g. for timber). Initiate Strengthen Sustain 2 MALAWI’S SOCIAL PROTECTION SYSTEM ADAPTS TO MOUNTING RISKS 2. Malawi’s Social Protection System Adapts to Mounting Risks 39 Introduction In Malawi, decades of modest economic growth have resulted in stubbornly high poverty rates. While the annual GDP growth rate has averaged 4 percent over the last 30 years, 71.9 percent of Malawi’s popu- lation remains below the international poverty line, and about 46 percent of national income accrues to the richest 20 percent of the population (UNCTAD 2023). In 2019, the official poverty rate remained close to 51 percent, virtually unchanged from 10 years earlier (World Bank 2022b). Moreover, the growth elastic- ity of poverty is very low, and growth has a weaker impact on poverty in Malawi than it does in countries with similar economic structures, growth rates, and levels of private-sector development such as Rwanda, Tanzania, Uganda, and Mali.7 With an average population growth rate of close to 3 percent per year during the 2010s, the number of people living below the poverty line increased by 2 million over the decade, result- ing in over 9 million people living in poverty by 2019. Moreover, the poverty gap increased between 2010 and 2019,8 indicating that the average poor household had fallen even deeper into poverty over the period. Inequality declined between 2010 and 2019, but this was mainly due to wealthier households reduc- ing their consumption, further highlighting the lack of inclusive economic growth. Inequality stag- nated during 2016 – 19, with consumption among the poorest 40 percent of households falling slightly, while consumption among the top 60 percent ticked up. While most of the poor live in rural areas, urban poverty and inequality both increased during 2010 – 2019, raising doubts about the poverty-re- duction potential of Malawi’s ongoing urbanization (World Bank 2022a). Malawi is exceptionally vulnerable to climate change and other shocks. From 1980 to 2014, Malawi exhibited the greatest sensitivity to extreme dry events of any country. Even transitory shocks have the potential to exacerbate rural poverty and may push an additional two out of every five nonpoor house- holds below the poverty line (World Bank 2022b). Between 2015 and 2017, floods and droughts inflicted economic losses equal to an estimated 5 percent of GDP. Over the last five years, extreme weather events such as cyclones, floods, and droughts, compounded by weather-related cholera outbreaks and the im- pact of the COVID-19 pandemic, substantially reduced agricultural output, worsened living conditions, and led to rising inflation and food shortages. Accelerated by rapid population growth and environmen- tal degradation and exacerbated by severe macroeconomic im- balances and years of underinvestment in climate adaptation, FIGURE 2.1  Poverty and droughts the impact of increasingly frequent weather shocks on Malawi’s Change in poverty rate economy and population is expected to worsen over time. 3.0 Due to their greater direct exposure to shocks and limited 2.0 coping mechanisms, poor households have been shoulder- ing much of the burden of climate change. For every three 1.0 Percentage point Malawians that escaped poverty between 2010 and 2019, four fell into poverty due to weather-related shocks (World Bank 0.0 2022b). Around 60 percent of Malawians lived below the pov- erty line either in 2010, 2019, or both, underscoring the persis- −1.0 tent nature of poverty. Moreover, a climate shock increased the probability of a household being poor by 14 percentage points. −2.0 Poverty in Malawi is closely linked to rainfall, with a year of good rainfall being associated with a 2 percentage-point decrease in −3.0 Good rainfall Average rainfall Bad rainfall the poverty rate and a year of bad rainfall associated with a 2.5 percentage-point increase (Gascoigne et al. 2023) (Figure 2.1). Source: Gascoigne et al. 2023. 7.  Many factors may lie behind this low elasticity, including the low return of human and physical household assets and the migration of poor households to areas with undynamic labor markets, the incidence of shocks, and the lack of income diversifica- tion for poor households. 8.  The poverty gap is an indicator of the severity of poverty rather than its prevalence. It measures the distance between the aver- age income of the poor and the poverty line. 2. Malawi’s Social Protection System Adapts to Mounting Risks 40 Evidence from the last two decades shows that Malawi’s social protection programs have played a key role in shielding households from shocks. The Social Cash Transfer Program (SCTP) has had an especially positive impact on equity, resilience, and long-term opportunities, and it compares favora- bly against 27 similar programs in 14 African countries. Among other achievements, the SCTP has led to a 23 percent increase in food consumption and health-seeking behavior among beneficiaries. The pro- gram has also helped households become more resilient to shocks by fostering investments in produc- tive assets (World Bank 2022d). As macroeconomic risks increase and Malawi continues to face multi- ple successive and overlapping shocks, the government must continue to build on the foundation laid over the last two decades by making social protection programs even more shock-responsive and bet- ter able to adapt to change. BOX 2.1  A brief overview of social protection Social protection systems help individuals and societies manage households by attenuating the negative impact of shocks, risk and volatility, mitigate the impact of shocks on poverty, and enabling them to more effectively protect their human capi- access economic opportunity. Clear evidence shows that social tal. These types of programs include unemployment and dis- protection programs deliver critical support that helps reduce ability insurance, old-age pensions, and adaptable and scala- poverty and promote long-term economic growth. Social pro- ble social assistance programs. Many labor regulations aim to tection includes instruments ranging from social insurance to manage the risks faced by workers—for example, by mandat- labor-market programs, social assistance, food aid, and targeted ing safety standards, sick leave, parental leave, or severance healthcare support, with multiple forms of assistance often con- pay. In Malawi, as in many countries with a large informal sec- tributing to more than one goal. Malawi’s first and second National tor, these programs cover a relatively small share of workers, Social Protection Programs set forth three key objectives: especially public employees. • Foster equity by reducing poverty and inequality, promoting • Promote opportunity by supporting household investments in equality of opportunity, and minimizing exclusion. Many social human capital and helping men and women to access more assistance programs, including cash and in-kind transfers, productive employment. By providing income support to indi- are designed to directly reduce poverty by shoring up house- viduals and households living in poverty, social assistance hold welfare. By helping poor households access basic nutri- bolsters demand for education, health, and nutrition, all of tion, health, and education services, these programs pro- which build human capital. Labor programs help beneficiaries tect human capital and contribute to equality of opportunity. build their skills and acquire work experience to enhance their Malawi has developed a range of social assistance programs productivity and job prospects while helping them find bet- that provide direct support to poor and vulnerable households. ter employment opportunities. They also help micro and small • Build the resilience of individuals and households by provid- enterprises expand and grow. Programs that enhance oppor- ing them with insurance against shocks and reinforcing their tunity are increasingly important as new technologies, evolv- capacity to manage shocks. Social insurance and social assis- ing demographics, and climate change continue to transform tance programs can build the resilience of individuals and Malawi’s economy. Source: Replicated and adapted from World Bank 2022c. Social Protection in Malawi: An Expanding and Innovative System Able to Respond to Shocks The social protection system has evolved dramatically over the last two decades. Beginning as a col- lection of fragmented, small, and exclusively donor-financed initiatives, the social protection system is now a coherent set of programs, some of which cover large sections of the population. The system is centrally coordinated, with programs implemented jointly by the central and local governments, and it is supported by a well-functioning and swiftly expanding digital infrastructure. Over the years, the country’s social protection system has become more efficient, and the coverage of households in the poorest quintile has steadily increased.9 9.  According to the World Bank’s ASPIRE database, while in 2010/11, 19.4 percent of beneficiaries of social safety net programs belonged to the poorest quintile, in 2013, it was 21.5 percent, and in 2016/17, it was 27 percent. 2. Malawi’s Social Protection System Adapts to Mounting Risks 41 Dynamic and Shock-Sensitive Core Social Assistance Programs Since 2020, Malawi’s main social protection initiatives and delivery systems have been developed un- der the Social Support for Resilient Livelihoods Project (SSRLP) as part of the National Social Protection Strategy. The SSRLP is a six-year initiative designed to improve resilience among poor and vulnerable house- holds and strengthen social protection at the national level. The program is implemented by the National Local Government Finance Committee (NLGFC) and by the Ministry of Gender, Community Development and Social Welfare, with financing from the World Bank, the Government of Germany, Malawi’s Social Protection MDTF,10 and the Government of Malawi. The SSRLP includes three core social assistance programs, all of which have been significantly expanded over the last five years: the Social Cash Transfer Program (SCTP), the Climate Smart Enhanced Public Works Program (CS-EPWP), and the Livelihood Support program.11 The SCTP, known locally as Mtukula Pakhomo, provides unconditional monthly financial support to the poorest and most vulnerable households. It aims to lift them out of poverty while building human capital and resilience at the household level. The program is fi- nanced by the World Bank, the European Union, the Government FIGURE 2.2  The number of SCTP beneficiaries of Germany, the Government of Ireland, and the Government of 300 1.4 Malawi, and it currently covers all districts in the country. The 250 1.2 SCTP supports about 300,000 extremely poor households, cov- Households, Thousand 1.0 Individuals, Million ering roughly 6 percent of all households in the country and al- 200 most 1.3 million people (Government of Malawi 2022) (Figure 2.2). 0.8 150 0.6 100 The SCTP’s positive impact on beneficiary households and com- 0.4 munities is well established. A 2016 evaluation by the University 50 0.2 of North Carolina found that the STCP was associated with sig- 0 0.0 nificant improvement in the welfare of beneficiaries. Consistent 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 with the international experience, the evaluation uncovered Number of Households Number of Individuals further proof that households tend to use the cash they receive wisely, as transfers were used to purchase food and to invest in Source: SCTP Administrative Records. education, health services and productive assets. Relative to non-beneficiaries, SCTP households displayed a 21 percent in- FIGURE 2.3  SCTP eligibility criteria crease in the ownership of livestock, a 60 percent increase in crop value, and an 86 percent increase in spending on produc- Households tive tools such as agriculture assets and livestock. SCTP bene- ficiaries were also more likely to delay sexual debut and had a Ultra - Poor Labour - Constrained higher average age of first pregnancy. Children in SCTP benefi- ciary households were 12 percent and 16 percent more likely to be enrolled in primary and secondary school, respectively, in- 1 meal per day No members 19–64 years are fit for work dicating a greater likelihood of escaping the cycle of poverty. Survives from begging Members 19–25 years are still Finally, every dollar disbursed by SCTP generated US$1.69 for Undernourished attending school the local economy, a powerful multiplier effect showing that Does not possess any valuable assets Dependency ratio > 3 investments in social protection generate a highly positive eco- Does not receive any monetary nomic return (University of North Carolina at Chapel Hill 2016). assistance, food or gifts from others In recent years, rising inflation and currency depreciation have Source: Replicated from SSRLP Operational Manual. eroded the real value of the average SCTP transfer, jeopardizing Note: According to STCP’s strategy, the program will gradually revise its targeting criteria to include more categorical elements (i.e., to prioritize specific groups of society the achievements of the program. The international experience based on demographics or vulnerability profile). 10.  Malawi Social Protection MDTF donors are the European Union, the United States Agency for International Development, Ireland, Iceland, Norway and the United Kingdom’s Foreign Commonwealth Development Office. 11.  The School Meals Program, targeting about 600,000 children as of 2021 in seven districts (Chikwawa, Dedza Mangochi, Phalombe, Nsanje, Salima and Zomba), funded by the European Union and implemented by WFP in partnership with local gov- ernments, is the country’s largest safety net, though it focuses on children and in-kind benefits. Because it is implemented mostly by non-state actors, the program is not considered in this section. 2. Malawi’s Social Protection System Adapts to Mounting Risks 42 indicates that a transfer equal to about 20 percent of household BOX 2.2  Conditional and unconditional cash transfers consumption can have a transformative effect on beneficiaries. Currently, transfers to just 30 percent of households reach this Transfers provided through the SCTP are unconditional, meaning that beneficiaries are not required to take any spec- level. The last nominal increase in benefits was in October 2023, ified action in order to qualify for benefits. In other countries, and a further increase in 2025 may be necessary to maintain the similar programs impose conditions such as obtaining repro- program’s impact (Government of Malawi 2024). ductive health care or enrolling children in school. Almost three decades of evidence shows that while conditional cash The Climate-Smart Enhanced Public Works Program transfers (CCTs) appear to have a greater short-term impact on human capital than unconditional cash transfers (UCTs), (CS-EPWP), also known as Mbwezera Chilengedwe, provides the latter do more to improve psychological wellbeing and income support and increases food security while build- reduce teen pregnancy and child marriage. In low-income ing resilience to climate shocks by creating durable com- settings, where public services are of limited availability and munity-owned assets. Poor households, which often depend quality, imposing conditions may further marginalize the on subsistence agriculture, are highly vulnerable to climate poorest and most vulnerable, who are typically those least able to comply. CCTs can also create opportunities for abuse change and environmental degradation. Building on the suc- of power by those responsible for monitoring and enforc- cess of previous public works programs in Malawi, the World ing them, exacerbating unequal power dynamics at the local Bank and other donors have been supporting CS-EPWP since level. Ultimately, the relative merits of UCTs and CCTs hinge its inception in 2020, including through a recently established on the types of outcomes policymakers are trying to achieve, multi-donor trust fund.12 Over the last four years, the CS-EPWP as well as their capacity to monitor compliance among ben- eficiaries. For programs covering remote areas or sectors has significantly expanded its coverage, and by May 2024 close with limited reporting infrastructure, imposing conditions to 520,000 extremely poor households had been enrolled in may be infeasible.a CS-EPWP across all of the country’s 28 rural districts. a. For a summary of this debate, see https://blogs.worldbank.org/en/ developmenttalk/how-should-we-design-cash-transfer-programs Implemented through district councils with support from NLGFC and the Department of Land Resource Conservation, the CS-EPWP targets extremely poor households with adequate labor capacity. Prospective beneficiar- ies are identified through the UBR. The local projects financed through the program contribute to cli- mate-change adaptation and mitigation and reduce households’ exposure to climate-related risks and shocks. Many projects focus on soil and water conservation, agro-forestry, and similar areas. In line with the National Social Support Program’s objective of building resilient livelihoods through a “cash plus” approach, the Livelihood Support component of SSRLP provides households with ancillary as- sistance aimed at enhancing their productive capacity. This component concentrates on fostering the de- velopment of income-generating activities by offering small grants aimed at self-employment or microen- terprise creation and supporting the formation of savings’ groups; skills development through trainings on topics like business planning, bookkeeping, and group mobilization; as well as financial literacy and inclusion through the promotion of digital payments and the use of mobile money and other financial technologies. The Social Protection System and Infrastructure Institutional Arrangements and Donor Dependence The institutional fragmentation of the social protection sector complicates coordination among stakeholders. While a lot of planning and implementation capacity has been built within Government over the last decade around social protection, several different line ministries are tasked with imple- menting various aspects of the different programs. The Ministry of Gender, Community Development and Social Welfare implements the SCTP, while NLGFC and the Ministry of Local Government imple- ment the CS-EPWP. The Poverty Reduction and Social Protection Division of the Ministry of Finance and Economic Affairs (MoFEA) oversees the implementation of the National Social Protection Policy and coordinates the sector, but constraints related to ICT and continuous training limit the ability to 12.  Other donors to the MDTF that finances the CS-EPWP include the European Union, Iceland, Norway, the UK’s Foreign Commonwealth Development Office, and the United States Agency for International Development 2. Malawi’s Social Protection System Adapts to Mounting Risks 43 fulfill its role. The National Social Support Steering Committee and its Technical Committees have limited capacity to provide strategic guidance to line ministries and agencies. Malawi’s 2018 National Social Support Programme II called for establishing thematic working groups on shock-sensitive pro- grams and other aspects of social protection, but these groups have yet to be established. However, the creation of the MDTF is a positive step towards improving donor coordination. The budget for social protection remains low and heavily donor-dependent, which could jeopard- ize the system’s overall effectiveness in supporting climate-change adaptation among poor and vul- nerable households.13 Only 3.4 percent of the national budget is allocated to safety nets, which include SCTP and CS-EPWP transfers and a few smaller emergency-related measures that were temporarily incor- porated into the SCTP. Total spending on social safety nets averaged 0.8 percent of GDP between 2011 and 2019 and reached 0.9 percent in 2023, still well below the Sub-Saharan Africa average of 1.2 percent. Development partners provide over 95 percent of the SCTP budget and almost all CS-EPWP resources (World Bank 2022a, and UNICEF 2023). The country’s challenging fiscal position and debt dynamics pre- vent a significant increase in social protection spending in the short term, even though greater invest- ments in the social protection sector would likely yield a highly positive return. Innovative Shock-Responsive Financing To address the sector’s financing challenges, a comprehensive package of earmarked contingent funding was adopted, with additional parametric risk insurance, to respond to multidimensional crises, particularly droughts, and to provide support to affected households through the SSRLP. By linking disaster risk financing and social protection programs, the government allocated financing for shock-responsive cash transfers in advance. Under the project, various instruments to respond to dis- asters and shocks have been established, including: (i) disaster risk financing instruments such as para- metric insurance and flexible contingency funds to financially prepare for timely shock-responsive cash transfers, and (ii) measures embedding adaptable shock response in the design of the SCTP and CS-EPWP. Harmonized Digital Delivery Systems The UBR is a vital component of the SSRLP and other shock-response mechanisms. In 2016, the gov- ernment envisioned the UBR as a single repository of household-level information to assist in harmo- nizing beneficiary outreach and registration for social protection and other government programs. The UBR has since evolved to include information both on current beneficiaries and potential beneficiaries. The UBR serves as a central platform to support the targeting of poor and vulnerable households across different programs. The UBR identifies households based on their socioeconomic status using information on asset ownership and other household characteristics. The data included in the UBR enables the government to monitor which programs different households are enrolled in and identify redundancies across programs. The UBR currently includes demographic and socioeconomic data on a total of 3.9 million households (16,102,922 individuals), representing approximately 77 percent of the total population and 95 percent of the rural population. Housed in MoFEA’s Directorate for Poverty Reduction and Social Protection, UBR data is collected every four years using the “census sweep” approach and a harmonized data-collec- tion tool. Five programs currently use the UBR data for targeting,14 and many different institutions have 13.  The figures in this paragraph do not include the budget for the AIP program, which is a subsidy linked to agricultural inputs. 14.  These programs include the SCTP, CS-EPWP, and Shock Responsive Social Protection programs (Lean Season/Food Insecurity/ Price Shock Responses and Scalable safety nets). The UBR also supports targeting across other small-scale interventions implemented by various agencies such as WFP, UNICEF, and nongovernmental organizations. This has enabled the UBR to attain some key attributes of a good social registry i.e., cost saving, efficiency, coordination, reduced targeting errors, and improved response to shocks. 2. Malawi’s Social Protection System Adapts to Mounting Risks 44 access to the data for various purposes, helping to streamline services and program delivery across the country and allowing for better coordination among line ministries, agencies, and donors (Table 2.1). TABLE 2.1  Institutions currently using UBR data Name of Institution Purpose Coverage Ministry of Gender Targeting SCTP beneficiaries All councils District Councils Targeting CS-EPWP beneficiaries All 28 councils Ministry of Agriculture Targeting for AIP 18 Councils Red Cross Rapid disaster assessment Mulanje, Machinga, Phalombe, Zomba DODMA -Mulanje and Thyolo Humanitarian response Mulanje and Thyolo ENDEV – GIZ Targeting for the Demand Side Subsidy Program Balaka, Nkhatabay, Dedza and Salima NLGFC – Scalable Safety Nets Targeting beneficiaries Karonga SOS Mzuzu Targeting orphans and vulnerable children TA Kampingo SIbande (Mzimba) Care Malawi International Targeting households Mangochi UNDP Tracking indicators for the Sustainable Development Goals Nsanje National Planning Commission Developing the New Malawi Vision 12 Districts Concern WorldWide Preparing a pilot graduation package Chikwawa Give Directly Triangulating data for poverty mapping Lilongwe District – TA Khongoni The World Bank Monitoring poverty All Councils NRB Validating national IDs Selected Councils UMEA Universidad Academic research Nsanje & Chikwawa Source: Author's representation. The UBR is partially integrated with the management information systems of the SCTP and the CS-EPWP, and data is shared through a one-way Application Program Interface. A 2022 memorandum of understanding between the MoFEA and the National Registration Bureau enabled the integration of the UBR and National Identification System, as the latter is used to uniquely identify social protection beneficiaries. The UBR is one of the databases that will be linked through a government data-exchange platform (“Boma Lathu”) to the National Identification System and other government databases to en- hance data exchange and improve timeliness and data quality. UBR data are critical to make effective policy decisions and support targeted crisis-response efforts. The UBR’s georeferenced data are close to achieving full population coverage in the most disaster-prone districts. Information on households’ vulnerabilities, location, enrollment in different programs, and other characteristics is referenced against indicators of shock exposure in different parts of the coun- try, informing preparedness and response measures. Under the SSRLP, the use of digital payments has increased significantly, with about 440,000 house- holds across 10 districts currently being paid STCP benefits or CS-EPWP wages electronically. Digital payments contribute to the efficient and timely delivery of benefits. Traceability, payment reports, and reconciliation processes are automatic and reliable, avoiding the errors, delays, and increased risk of fraud associated with manual processes. Digital payments are also much more convenient for benefi- ciaries, as funds are delivered directly to the intended recipient (subject to authentication) and may be withdrawn as needed rather than all at once. Digital payments have allowed for rapid transfers during emergencies, when support is especially urgent. The digital payments infrastructure developed under the SSRLP can also be used across government departments and by donors and humanitarian organi- zations to rapidly scale up their support and quickly reach affected populations. Digital payments have encouraged financial inclusion by increasing access to formal financial ser- vices among beneficiaries. Beneficiaries are currently being paid through mobile-money platforms and banks, enabling them to save, borrow, and build financial resilience. Introducing digital payments 2. Malawi’s Social Protection System Adapts to Mounting Risks 45 in areas underserved by the financial sector, where many beneficiaries reside, gives financial-service providers the opportunity to reach new customers, prompting them to make complementary invest- ments in infrastructure or tailor-made products for poor households. Social Protection as an Adaptive Crisis Response Tool The COVID-19 Urban Cash Initiative (CUCI) Malawi’s first major shock-responsive cash-transfer program was the COVID-19 Urban Cash Initiative (CUCI) implemented as part of the 2020 National COVID-19 Preparedness and Response Plan (World Bank 2021 and Government of Malawi 2023). The initiative aimed at mitigating the adverse impacts of the pandemic on livelihoods, human capital accumulation, and basic consumption among poor households in the cities of Lilongwe, Blantyre, Zomba, and Mzuzu. It targeted 35 percent of each city’s population. In 2021, about 199,000 households received the equivalent of the minimum wage at the time, MK 35,000 (about US$45), per month for three months. CUCI was the first cash-transfer program in urban centers and in a number of areas where no regular social safety net had previously existed. A rigorous evaluation of the CUCI documented its positive effects, particularly in terms of increasing resilience and mitigating the economic and social impact of the pandemic (Government of Malawi 2023). Close to 70 percent of CUCI beneficiaries spent at least part of their benefit on food, with an aver- age of 30 percent of the total payment devoted to food purchases. The second largest share of CUCI ben- efits went to protecting businesses, with about 45 percent of beneficiaries using an average of 40 percent of the provided benefits for this purpose. About one-third of CUCI recipients used about 25 percent of the funds to support their children’s education. The intervention increased both the quality and quantity of food consumed among beneficiaries relative to non-beneficiaries. Crucially, CUCI beneficiaries were less likely to resort to negative coping mechanisms such as selling productive assets or incurring debt. Emergency Cash Transfers in Response to Floods, Tropical Cyclones, and Price Shocks By leveraging the information compiled in the UBR and utilizing the targeting methodology and geographical coverage of SCTP and CS-EPWP, the government was able to provide rapid support to poor and vulnerable households in response to multiple shocks. The response effort included a tem- porary increase in support to existing program beneficiaries, the expansion of programs to new house- holds, or through a combination of both. • In response to the 2019 floods caused by Cyclone Ida, SCTP support was scaled up by providing additional transfers to 31,587 beneficiary households in five affected districts. • Shortly after Cyclone Freddy hit Malawi in March 2023, killing over 1,200 people and destroy- ing livelihoods and infrastructure, the government approved the Early Recovery and Food Insecurity Response. Under the SSRLP, close to 195,000 households (about 875,000 people or 4 percent of the population) across nine districts received MK 150,000 to bolster their resilience. Another 67,000 households in five additional districts received a combination of support to mit- igate the impact of Cyclone Freddy, inflation, and food insecurity. • The government has implemented temporary measures to support the urban poor and vulner- able from the effects of the recent currency devaluation and subsequent increase in inflation. Building once again on the SCTP, the Urban Price Shock Emergency Response intervention was launched in March 2024. A scheme similar to the Early Recovery and Food Insecurity Response, the Urban Price Shock Emergency Response provided support to about 105,000 households (about 470,000 people) in the cities of Blantyre, Lilongwe, Mzuzu, and Zomba. 2. Malawi’s Social Protection System Adapts to Mounting Risks 46 • In October 2023, benefit levels for regular SCTP payments were permanently increased by over 65 percent, from MK 9,000 to MK 15,000, to compensate for the rising cost of living. Digital pay- ments facilitated a swift transition to the new benefit level. The Future of Adaptive Social Protection in Malawi: Scalable Safety Nets Climate-related events such as floods and droughts disproportionally affect poor and vulnerable households, and Malawi as a whole is highly exposed to climate shocks. The Disaster Risk Financing Strategy for 2018 – 2024 outlines strategic priorities and financial instruments designed to enhance Malawi’s financial resilience to disasters. The main pillars of the strategy are sound risk assessments, adequate disaster risk finance mechanisms, and clear imple- mentation rules. In line with the strategy, the Scalable Safety FIGURE 2.4  The scalability mechanism Nets effort was incorporated into the SCTP to provide cash to vulnerable households following a drought (Figure 2.4). The mechanism uses existing SCTP systems to provide additional benefits to existing beneficiaries and to temporarily include Scalability additional households, selected from among the CS-EPWP ben- Additional Component Vertical Expansion Grant eficiaries, that have become vulnerable because of a drought. The benefit amount is MK 50,000 per household per month for three months. Regular SCTP Regular Benefit Program Beneficiaries Under the Scalable Safety Nets program, about 151,000 house- holds currently enrolled in SCTP and CS-EPWP are eligible for Ultra-poor Near-poor/ Low- additional cash when drought conditions materialize across & labor Vulnerable income constrained the six districts.15 These districts were selected for the initial phase of the program based on a review of drought vulnera- Horizonal Expansion bility, food insecurity, poverty levels, and the readiness of the Source: Author's representation. delivery systems to enable a timely response. The mechanism is triggered using satellite data on rainfall in the six districts16 and is managed by a cross-departmen- tal task force led by the MoFEA and NLGFC. Over the last two years, nearly 85,000 households have ben- efited from additional transfers in the pilot district of Karonga. The program’s scalable component is funded by an innovative risk-financing package that com- bines flexible contingent financing and disaster-risk insurance. The SSRLP includes US$20 million in contingent World Bank financing, as well as a sovereign parametric insurance package issued by the African Risk Capacity (ARC) with a US$10 million-dollar premium funded by a grant from the Global Shield Financing Facility.17 The funding is released to the government to finance cash transfers once the specified drought conditions have been met. Based on the preliminary information available for the 2023/24 season, disbursements will be triggered in at least four districts, and funds will be released from both instruments to meet the cost of the additional cash transfers. Payments to households are expected to be made in early July 2024, but the envisioned amount of MK 25,000 per month for three months is currently being reviewed in light of the recent devaluation and the support being provided under other programs. A total of about 151,000 households are set to receive support through the scal- able component, with roughly US$6 million coming from the ARC insurance policy (Table 2.2). 15.  Blantyre, Chiradzulu, Ntcheu, Nkhotakota, Thyolo, and Karonga. 16.  A secondary trigger (called “evidence review”) is also defined. This is a soft trigger to be used as a failsafe to capture the impact of droughts, which may not be captured by the primary trigger. 17.  The African Risk Capacity (ARC) Group is a Specialized Agency of the African Union established to help African governments improve their capacities to better plan, prepare, and respond to extreme weather events and natural disasters. 2. Malawi’s Social Protection System Adapts to Mounting Risks 47 TABLE 2.2  Scaled-up coverage for SCTs as of February 2024 Regular SCTP households selected Non-SCTP households Total number of households to be District to receive additional benefit selected to receive support covered by the scalable component Blantyre 7,815 10,879 18,694 Ntcheu 14,355 11,991 26,346 Thyolo 19,000 10,598 29,598 Karonga  7,483 5,259 12,742 Chiradzulu 6,453 8,941 15,394 Nkhotakota 7,701 5,882 13,583 Balaka 10,070   10,070 Mwanza 3,384   3,384 Chikwawa 14,263   14,263 Nsanje 7,074   7,074 TOTALS 97,598 53,550 151,148 Source: Unified Beneficiary Registry. The Scalable Safety Nets component of the SSRLP is among the world’s most innovative social safety net programs. Several countries have joined risk pools or use parametric insurance via mechanisms such as ARC or the Caribbean Catastrophe Risk Insurance Facility, and some have operational plans specifying that a given share of the payouts must be devoted to shock-responsive social protection pro- grams. However, most lack clear criteria for identifying beneficiaries or predetermined rules for pay- outs, which delays response times. Other countries, such as Uganda, have set up contingent funding for climate shocks using World Bank funds. However, Malawi is the only country to have implemented a financing plan backed by multiple instruments (risk financing plus contingent financing) with prede- fined triggers for funds that routinely flow through the public sector. While Malawi is building one of the world’s most advanced shock-responsive social protection systems, the country’s intense climate vulnerability requires further investments in safety nets that can support households amid multiple successive and overlapping shocks. Building on a Strong Foundation: The Future of Malawi’s Shock-Responsive Social Protection System Recent efforts to make Malawi’s social protection system more responsive to shocks have demon- strated the system’s potential both to provide immediate relief to households in the face of crises and to build long-term resilience among the households and communities most affected by climate change. These achievements provide a strong foundation for continued investments in social protec- tion. Despite the sophistication of Malawi’s social protection system, low coverage and benefit levels limit its impact on poverty and inequality. As the government and donors launch the next phase of the SSRLP program, drawing on lessons learned from the SCTP program and a forthcoming evaluation of the CS-EPWP could enable stakeholders to assess how the current mix of programs can be improved to strengthen its contribution to poverty reduction in a context of accelerating climate change. Programs and Institutions Most of Malawi’s social protection programs have relatively modest coverage levels, and their ben- efits continue to be eroded by inflation and currency depreciation. In the short term, consolidating programs that have similar objectives and target the same type of households, such as the small human- itarian programs operating in a limited number of districts, would rationalize the overall system and 2. Malawi’s Social Protection System Adapts to Mounting Risks 48 reduce administrative costs. At the same time, stakeholders must review the benefits provided by the different programs to ensure that the support provided is adequate to meet household needs while preserving fiscal sustainability. The government has yet to approve the updated National Social Support Policy and the new National Social Protection Strategy — the successor to the Malawi National Social Support Program, which closed in June 2023. The social protection sector currently lacks an overall vision for shock-sensitive social protection. In the near term, reforming the sector’s institutional framework would help formal- ize the recent changes and achievements. Strengthening the capacity of MoFEA’s Poverty Reduction and Social Protection Division to oversee the implementation of the policy by onboarding additional staff and conducting trainings on strategic planning, budgeting, and monitoring could improve sec- toral coordination. Financing Malawi’s spending on safety net programs remains below the regional average. The recent introduc- tion of contingent funding for shock response, the use of parametric insurance, the leveraging of funds from the Global Shield Financing Facility to hedge against extreme weather events, and the use of mul- ti-donor financing for social cash transfers are innovative and forward-looking developments. Going forward, strengthening the links between the country’s adaptive safety nets and the various forms of disaster and climate-risk financing available at the global level could increase the financial resources available to support Malawi’s social protection system. Donors provide over 95 percent of the resources going to the social protection system. Tight fiscal constraints continue to inhibit the allocation of additional domestic resources to the sector, and the lack of a clear financing plan beyond a five-year horizon complicates long term-strategic decisions. The resulting uncertainty may jeopardize the overall system’s effectiveness in supporting climate resil- ience among poor and vulnerable households. In the medium term, policymakers must implement the National Social Protection Strategy and establish a financing framework designed to gradually formal- ize social protection as a standard expenditure item in the national budget. In the near term, shifting budget allocations away from the AIP and other subsidy programs could free up additional resources for programs such as the SSRLP. The AIP imposes a significant fiscal bur- den, but its targeting mechanism does not focus on the poorest households, and its impact on agricul- tural output appears marginal at best. Tightening enforcement of AIP eligibility criteria and consolidat- ing beneficiaries of multiple support programs could generate an estimated US$40 million in savings. These resources could be reallocated to expand the coverage of the SSRLP and shield poor households from the loss of the benefits they had been receiving through AIP. Shock Responsiveness and Adaptation The SSRLP’s Scalable Safety Nets component is unique and places Malawi at the forefront of the world’s adaptive and climate-responsive social protection systems. After considerable delays, the approval of the Disaster Risk Management Act is more closely integrating Malawi’s disaster risk financ- ing strategy into the social protection system. Further leveraging global financing for climate adapta- tion and disaster risks mitigation could increase the resources available for social protection. Over the longer term, the government should pivot away from relying on donors and humanitarian agencies to support disaster response efforts and strengthen the capacity of the domestic social pro- tection system to respond to shocks. Humanitarian assistance, which remains a crucial part of crisis response in Malawi, mainly operates outside the government’s systems. In-kind support, such as food 2. Malawi’s Social Protection System Adapts to Mounting Risks 49 aid, is non-fungible and may distort local prices. Building on the shock-responsive systems already in place, the government should consider further integrating emergency support into the Scalable Safety Nets program. Beneficiary Registration and Management The 2022 – 2026 UBR strategy sets forth objectives for the system’s development. The strategy aims to expand the coverage of the UBR, tighten its linkages with other programs and institutions, improve the timeliness of the data, and provide real-time information on programs and beneficiaries. Expanding the coverage of the UBR to urban areas would support improved targeting and implementation of urban safety nets. Fully integrating the UBR with the National Identification System would help verify ben- eficiaries and ensure their unique identification, while continuing to strengthen data-security proto- cols will help to ensure privacy. Connecting the UBR with other national databases would enable the exchange of data across min- istries and agencies. Integrating the UBR with the AIP database and other information systems would help rationalize the overall provision of government support. Further developing the linkages between early warning systems for floods and droughts and shock-responsive social protection programs would increase the speed of response efforts. Digitalization Expanding the use of digital payments would further strengthen the efficiency and integrity of the social protection system. The government should gradually roll out digital payments in the remain- ing districts. Developing a choice model that allows beneficiaries to select the payment service pro- vider would result in greater financial inclusion, better connectivity, and increased competition among mobile network operators and commercial banks. Finally, linking the digital payment system for social protection to the government’s e-payment gateway would help consolidate the management of public resources while fostering transparency and accountability. 50 APPENDIX A Macroeconomic Indicators   2019 2020 2021 2022 2023e 2024p 2025p National Accounts and Prices GDP at constant market prices (% change) 5.4 0.8 2.8 0.9 1.5 2.0 3.9 Agriculture 5.9 3.4 5.2 -1.0 0.6 -1.2 3.7 Industry 7.7 1.2 1.9 0.9 1.6 2.2 3.3 Services 5.5 -0.5 2.0 1.8 1.9 3.2 4.2 Consumer prices (annual average) 9.4 8.6 9.3 20.9 28.7 30  20.8  Central Government (FY % of GDP)               Revenue and grants 14.6 14.6 14.7 14.6 15.2 19.1 21.1 Domestic revenue (tax and non-tax) 13.2 13.1 12.8 12.8 12.1 13.1 15.7 Grants 1.4 1.5 1.9 1.8 3.1 6.0 3.9 Expenditure 19.1 20.9 21.5 23.2 25.7 31.5 27.8 Overall balance (excluding grants) -5.9 -7.8 -8.7 -10.4 -13.6 -18.4 -12.1 Overall balance (including grants) -4.5 -6.3 -6.8 -8.6 -10.5 -12.4 -6.7 Foreign financing 0.8 0.8 1.0 2.6 1.9 0.5 0.7 Domestic financing 3.8 4.9 5.9 7.7 5.1 7.0 6.0 Money and Credit               Broad money (% change) 10.2 16.7 30 38.8 32.2 35.3 18.8 Credit to the private sector (% change) 27.3 16.1 17.8 23.2 17.6 10.2 5.8    External Sector (US$ millions)               Exports (goods and services) 1148.0 1314.0 1591.0 1490.0 1563.0 1563.0 1819.0 Imports (goods and services) 3268.0 3376.0 3770.0 3707.0 3945.0 3949.0 4152.0 Gross official reserves 825.0 799.0 910.0 575.0 749.0 1112.0 1604.0 (months of imports) 3.0 2.8 2.9 1.9 2.3 3.4 4.6 Current account (percent of GDP) -11.6 -13.6 -15.2 -17.3  -16.1 -20.0 -19.6 Exchange rate (MK per US$ average) 745.9 749.5 805.9 949.0 1161.0 — Debt Stock               External debt (public sector, % of GDP) 27.8 32.9 31.5 34.8 48.5 47.4 46.8 Domestic public debt (percentage of GDP) 17.5 21.9 30 40.8 42.8 38.1 36.5 Total public debt (percentage of GDP) 45.3 54.8 61.5 75.7   91.3 85.5 83.3 Poverty               Poverty rate (US$ 1.90 in 2017 PPP terms) 70.1 70.7 70.6 71.3 71.7 72 71.4 Poverty rate (US$ 3.20 in 2017 PPP terms) 89.1 89.4 89.4 89.5 89.7 89.8 89.6 Poverty rate (US$ 5.50 in 2017 PPP terms) 97.3 97.4 97.4 97.5 97.5 97.5 97.5 Note: Indicators from April 2024 World Bank Macro Poverty Outlook based on data as of March 1. e indicates estimates and p indicates projections. 51 REFERENCES Amaglobeli, M. 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