Generators and distributors in Malawi's power sector have applied for a 99% tariff increase over 2022-25. The tariff rise will begin in late 2022, with 80% of the increment set to happen immediately and the rest to be spread over the remaining period, if granted by the Malawi Energy Regulatory Authority (MERA). In the light of this, we have revised our 2023 inflation forecast.
Why does it matter?
As firms in the power sector have not been charging cost-reflective tariffs, which has led to revenue deficits, the tariff increase is aimed at establishing cost reflectivity. The increase might improve the operational efficiencies of state power companies, but will come at a punitive cost to consumers and businesses that are already burdened with economic challenges.
Malawi is implementing power sector reforms following the enactment of the Electricity Amendment Act in 2016, but lack of investment is hindering government efforts. The entrance of Independent Power Producers, culminated in the unbundling of generation from the Electricity Supply Corporation of Malawi Limited (ESCOM) to a state enterprise, Electricity Generation Company. In 2020 the government operationalised Power Market Limited, an independent entity responsible for buying and selling electricity. As the unbundling increased costs for consumers, the government stepped in to subsidise electricity. In the base tariff period, 2018-22, state-run power companies accumulated a revenue deficit of MK112bn (about US$11.7m), as tariffs were not cost reflective. ESCOM currently buys electricity from power producers at MK140/kWh, but sells it at K104/kWh, translating to a 25.7% loss per kWh. That presents a fiscal drain through subsidies, which can leave state enterprises requiring huge bailouts, as was the case in 2018. Nonetheless, Malawi is negotiating an IMF programme, and has started to wind down subsidies on maize, suggesting that the tariff on electricity will go ahead.
The MERA will be forced to adjust tariffs by 99% for the next four-year period. As a consequence, cost-push inflation is inevitable, and we have revised our average inflation forecast for 2023, from 11.2% to 17.6%. Public frustration over the rising cost of living will intensify as consumers face high costs of electricity alongside high fuel and food prices.