Malawi's economic reliance on the export of agricultural commodities renders it particularly vulnerable to external shocks such as declining terms of trade and drought. High transport costs, which can comprise over 30% of its total import bill, constitute a serious impediment to economic development and trade. Malawi must import all its fuel products. Paucity of skilled labor; difficulty in obtaining expatriate employment permits; bureaucratic red tape; corruption; and inadequate and deteriorating road, electricity, water, and telecommunications infrastructure further hinder economic development in Malawi. However, recent government initiatives targeting improvements in the road infrastructure, together with private sector participation in railroad and telecommunications, have begun to render the investment environment more attractive.

Malawi has undertaken economic structural adjustment programs supported by the World Bank, the International Monetary Fund (IMF), and other donors since 1981. Broad reform objectives include stimulation of private sector activity and participation through the elimination of price controls and industrial licensing, liberalization of trade and foreign exchange, rationalization of taxes, privatization of state-owned enterprises, and civil service reform. Malawi qualified for Highly Indebted Poor Country (HIPC) debt relief.

In May 2004, the IMF program begun in 2000 was canceled and a Staff-Monitored Program (SMP) was implemented. In the wake of questions about fiscal creditability, the SMPís goal was to give Malawiís newly-elected government the chance to establish a track record of fiscal discipline. A new Poverty Reduction and Growth Facility (PRGF) was approved on August 5, 2005 after a successful SMP.

Real GDP increased by an estimated 4.6% in 2004, from 3.9% in 2003 and 2.1% in 2002. Inflation has been largely under control since 2003, averaging 10% in that year and 11.1% (est.) in 2004. Discount and commercial lending rates also declined from 40%-45% in 2003 to 25% in early 2004. The Kwacha slid from 90 to 101 against the U.S. dollar in mid-2003 and was at 108 to the U.S. dollar at the end of 2004. As of November 2005, the Kwacha had depreciated further, to 120 to the U.S. dollar.

Malawi has bilateral trade agreements with its two major trading partners, South Africa and Zimbabwe, both of which allow duty-free entry of Malawian products into their countries.