At the end of February, Malawi was featured on KPMG’s Invest Africa. This was broadcast following the nationwide strike that saw a 61% pay hike for the lowest paid civil servants in Malawi.
To discuss the opportunities and challenges of Malawi as a business and investment destination Simon Schaefer, senior analyst at Frontier Advisory, Abel Myburgh, associate director at Africa Desk, BDO, and Samantha Louis, regional director at the Chartered Institute of Management Accountants, joined Invest Africa’s host Alishia Seckam.
Seckam points out the current situation that most Malawians are familiar with, although whether or not progress is being made is disputed across the nation,
For not it’s still a very challenging environment [...] work in progress that we are seeing unfold in that territory.
It would have been more interesting to hear from both foreign and national investors and from Malawian analysts. Nevertheless, we have decided to save you time by highlighting some of the main points below.
The videos are available online and have been embedded below.
- Economic Reforms: The current account deficit (widen to 845 million USD in 2011/2012, from a deficit of 548 million USD in 2009) widened last year due to the the shallow export base and overvaluation of the Kwacha against the USD, which saw an upsurge in import demand. Since taking office in April 2012, Joyce Banda has instituted a number of economic reforms that have restored credibility to the Malawian monetary policy environment, such as the devaluation of the Kwacha and a market determined exchange rate, along with introducing austerity measures, lauded by the international community (editor’s note: she faces growing criticism at home).
- Restoring credibility: Commitment of donors to Malawi is a positive start in restoring credibility to Malawi’s monetary policy environment, however, economies do not swing up in 6 months despite Joyce Banda’s promise that this would be the case given the economic reforms
- Current situation: Despite economic reforms, the business environment has deteriorated this fiscal year. It is not clear at this stage after only 10 months if Joyce Banda’s reforms will bear fruit although devaluation of the Kwacha and setting a market determined exchange rate will be good in the long-term as export goods will be more attractive to export markets. First, however, the country will continue to experience rising inflation. Malawi is dependent on its agricultural sector, which accounts for one-third of GDP and generates 90% of export revenue. Tobacco accounts for more than half of its exports. Malawi is ranked 157 out of 185 countries on World Bank’s Doing Business Index.
- Biggest challenge is to diversify the economy so that it is not entirely dependent on the agricultural sector’s exports. There is opportunity to diversify within the agricultural sector, through manufacturing of raw products such as tea and tobacco. There is also need to mitigate against the risk of foreign exchange shortages in the short term and decrease dependence on foreign aid in the long term.
- Opportunities for investors: Investors should build around current industries, such as introducing agricultural processing instead of exporting goods as raw products.
- Incentives for investors: Across the region, there is a “race to the bottom” for the best incentives, but without the infrastructure in place the incentives are not attractive for investors. Management of incentives (such as 15% tax for companies operating in priority industries) is key so that investors deliver the intended results and do not only take advantage of the business environment. Malawi does not offer any special incentives to foreign investors. Instead, incentives have to be discussed between investors and government, this leaves room for corruption, but gives the government the opportunity to attract the investors it wants to work with.
- Infrastructure is a problem area in Malawi, particularly the poor supply of electricity, which puts a strain on prices charged. The transportation infrastructure makes it expensive and difficult to take products to market and export. Maintenance is key. The upgrading of airports in Lilongwe and Blantyre with Chinese assistance will improve transportation bottlenecks (editor’s note: the railway project financed by the mining company Vale SA will also help improve regional and international trade by connect Malawi to Nacala port). Furthermore, increases in fuel prices makes doing business more expensive (editor’s note: in fact, the price of fuel went up yesterday)
- Education: There is a need to for well-trained and trustworthy government officials and for ensuring the skills are available in country to reduce costs of doing business (editor’s note: we recently discussed the need for improving skills along the mineral value chain in Malawi).
- Balancing foreign and local interests: Many investors “moving in to export”, but they can repackage products for local low-income market. Where investors are exporting they need to make sure that they are paying fair wages in country to ensure a lasting, valuable legacy. The government has made moves to protect infant industries by prevent foreign traders from operating in rural areas. Malawi’s relationship with China is not unique int he continent. Chinese investment is not without conditions. Important that this should not deter other investors.