Malawi

Sluggish growth and high inflation are perpetuating poverty

Economic growth is expected to remain insufficient in 2026 and 2027. Population growth will continue to outpace the economy (+2.6%), further deepening the decline in per capita income. The economy is highly dependent on agriculture, which employs nearly 60% of the workforce, accounts for about a quarter of GDP and generates 80% of export revenues. Largely rain-fed, low in productivity and poorly diversified (tobacco, maize, tea), the sector is vulnerable to frequent extreme weather events. Agricultural production is expected to recover (+2.5% in 2026) after two years of drought followed by flooding in the central region since January 2026. However, rising fertilizer prices could weigh on output in 2027. Mining activity will expand modestly with the reopening of the Kayelekera uranium mine (closed since 2013) in December 2025, and the gradual commissioning of the Kangankunde (rare earths) and Kanyika (niobium) mines by 2028. All three will be operated by Australian companies. Nevertheless, the contribution of mining to GDP (1%) will remain structurally limited despite ambitious long-term government targets (12% by 2063). The challenges facing the manufacturing sector (11% of GDP) will persist. Services (54% of GDP), including trade, transport, telecommunications, and real estate, will record only modest growth, as households—who make up a large share of demand—are under significant strain. A large portion of the population will continue to face food insecurity and poverty (76% live on less than USD 3 per day), while unemployment will remain high (19.7%). Access to electricity continues to be hampered by an underdeverloped grid relative to installed capacity. Over the medium term, the Mpatamanga Hydropower Storage Project (MHSP), a 301 MW hydropower project that is still in the financing phase, could support growth by strengthening the power network.

Rampant inflation slowed in the second half of 2025 as food prices eased, supported by large international maize donations. However, this trend could reverse with rising fuel prices, which are entirely import-dependent. Pump prices have been regulated since 2024, but the Malawi Energy Regulatory Authority (MERA) announced a 35% increase in diesel prices in April 2026, following an initial hike in January. Moreover, monetisation of the fiscal deficit will continue to fuel inflationary pressures. Last, weak foreign exchange reserves may lead both to import compression and force a devaluation, which would raise import costs. In practice, a peg to the US dollar has been maintained since 2024, but a significant share of foreign exchange transactions and imports takes place on the parallel market, where the exchange rate is two to three times weaker. As a result, the gradual rate cuts initiated in March 2026 (-200 bps, to 24%) could be put on hold by the central bank (RBM). Monetary policy remains both ineffective—due to limited financial intermediation—and accommodative, in order to contain the government’s domestic borrowing costs.

Precarious financial situation

To address recent climate shocks, the inflationary fallout from the war in Ukraine and the pandemic, Malawi implemented an expansionary fiscal policy that has exacerbated its debt burden. Malawi’s fiscal deficits (as a percentage of GDP) have been on average the second highest in Sub-Saharan Africa since 2022. It is expected to narrow slightly following a particularly large deficit in FY2025-2026 due to the electoral context. The FY2026-2027 budget provides for stable spending in real terms (32% of GDP) and a 14% increase in revenue, supported by higher tax intake and a rebound in international aid. However, the scale of the increase appears to unachievable given recent revenue trends (on average +0.5 percentage points of GDP per year). Scope for expenditure reduction remains constrained by debt servicing (43% of revenues), largely domestic, as well as by statutory obligations (wages, pensions). Consequently, in FY2025-2026, only 6% of domestic revenues were discretionary. The agricultural sector will continue to receive a significant share of the budget (6.6% of spending in FY2025-2026), notably through the fertiliser subsidy scheme, the Affordable Input Programme (AIP), whose cost is expected to rise markedly (0.7% of GDP in FY2025-2026). The increased decentralisation of infrastructure investment (33% of capital spending now managed at local level via the Constituency Development Fund (CDF), up from 3% in FY2025-2026) could help improve road and electricity networks. However, weak oversight of the CDF in recent years suggests a risk of slippage in local spending. External budget support (20% of revenues, 4% of GDP), mainly from the World Bank, will remain critical. Off-budget aid from the US and the EU, which accounted for 9% of GDP in 2024, declined in 2025 following the dismantling of USAID and the cancellation of a USD 350 million infrastructure support programme by the Millennium Challenge Corporation. Some health aid was, however, reinstated in January 2026 under the “America First Global Health Strategy Agreement,” which will provide USD 792 million over five years. Negotiations with the IMF on a new financing program have stalled. The deficit is financed through the issuance of short-term securities to the domestic financial sector, a significant portion of which is purchased by the RBM.

The current account is deep in deficit, reflecting a structural trade imbalance driven by a very narrow export base concentrated in low value-added sectors, as well as strong dependence on imports. As a result, foreign exchange reserves are extremely low (0.4 months of imports held by the RBM and 2.3 months for the economy as a whole in March 2026). The shortage of foreign currency puts a brake on imports. In April 2026, part of the country’s gold reserves was sold to address severe fuel shortages. The current account deficit is expected to widen in 2026, driven by higher prices for petroleum products (16% of imports) and fertilisers (6%). Export growth will provide partial offset, supported by tobacco (55% of exports) and a promising harvest (+13% year-on-year projected for 2026 according to the Tobacco Commission). Despite a ban on raw mineral exports since October 2025, the mining sector should contribute positively to the trade balance, supported by an exemption granted to the Kayelekera mine, which exports processed uranium (yellowcake). The services deficit (5% of GDP) and remittances (3.8% of GDP in 2024) are expected to remain stable. Financing relies on project-related aid and budget support.

The burden of Malawi’s very large public debt is expected to continue increasing in 2026. Its domestic component accounts for around 60% of the total and is growing. Malawi has defaulted on its external commercial creditors, primarily the Trade & Development Bank (TDB) and the African Export-Import Bank (Afreximbank). Consequently, it is turning more and more to the domestic banking market to borrow, despite very high rates (around a 6% real yield on average at three-year maturity), or else from the central bank, which holds 30% of domestic debt. External debt, by contrast, is largely concessional, with 70% held by multilateral creditors, mainly the World Bank, but also the IMF and the AfDB. Following its partial restructuring in 2024 through agreements with China and Kuwait, the amount of bilateral debt is now low (8% of external debt) and is primarily owed to China Exim Bank. Negotiations on restructuring external commercial debt are ongoing but progress is slow. The risk of a new default is high.

Political transition confronted with urgent reform needs

The general elections of September 2025 resulted in the first-round victory of former President Peter Mutharika (2014–2020), who secured 57% of the vote against the incumbent, Lazarus Chakwera, in a ballot marked by higher voter turnout (76%). While significant protests took place ahead of the vote, the announcement of the results met with a relatively peaceful response. However, the new administration is in a fragile position and is faced with a fragmented parliament and no outright majority. The ruling Democratic Progressive Party (DPP) secured 99 out of 229 seats. It relies on ad hoc alliances with independent members to pass certain legislation. The Malawi Congress Party (MCP), which is led by Mr. Chakwera and is now the main opposition force, won 52 seats. The rise of independent candidates reflects growing discontent with the two traditional parties, given the precarity of the economic situation and the lack of improvement. Mr. Mutharika’s rollout of unpopular IMF recommendations, which would pave the way for a financing agreement, appears unlikely in the medium term given the stormy social context.

Lilongwe maintains cordial relations with both the United States and the European Union, and with China, with the search for financial and humanitarian support remaining the main focus of Malawian diplomacy. At regional level, Malawi is a member of the Southern African Customs Union (SACU). The country is developing projects with its Mozambican and Zambian neighbours. Mozambique will lease part of its Nacala port to Malawi, thereby improving regional connectivity and allowing it sea access. A Mozambique–Malawi power interconnection project (MOMA) is also expected to be completed in 2026. By contrast, a long-standing border dispute persists with Tanzania over the demarcation of Lake Nyasa’s boundary, although tensions are minimal.

Last updated: June 2026