Malawi’s new President Joyce Banda inherited a very deprived economic situation after her predecessor President Mutharika suddenly died in April. Plagued by a structurally problematic balance of payments, Malawi was facing a severe shortage of foreign exchange reserves. Reserves dropped under half a month of import cover as the overvalued kwacha was stubbornly defended, resulting into international payment delays and shortages of crucial imports such as fuel and medicine. In 2011 Mutharika’s economic mismanagement and increasingly authoritarian rhetoric led to the interruption of IMF assistance and cut of donor aid programs.

Impact on country risk

Within a month after Joyce Banda took office she lifted foreign exchange restrictions and removed the dollar peg, devaluating the kwacha with around 50%. Monetary policy was tightened by raising the bank rate to 16% as to contain inflationary pressure after the devaluation. However, combined with increasing fuel and electricity prices as a result of price control removal, inflation is expected to accelerate to 18.4% in 2012. President Banda is internationally praised for her bold actions on human rights, democratic accountability and structural economic reform which recently got Malawi back on track with the IMF while donors restored their aid programs.

Analyst: Louise Van Cauwenbergh, l.vancauwenbergh@credendogroup.com