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IMPACT OF THE GLOBAL ECONOMIC CR

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IMPACT OF THE GLOBAL ECONOMIC CR Powered By Docstoc
					          IMPACT OF THE GLOBAL
           ECONOMIC CRISIS ON
        SELECTED SADC COUNTRIES

                   Malawi Report

                  November 2009




www.imanidevelopment.com
Contents
INTRODUCTION ........................................................................................................................... 4
   1.1. Geographical, Population and Socio-economic Profile ................................ 4
Malawi Context .......................................................................................................................... 4
   1.2. Country-specific context .......................................................................................... 7
2. METHODOLOGICAL APPROACH AND ANALYTICAL FRAMEWORK .................... 10
   2.2.1. Baseline survey of employers ................................................................................ 10
   2.2.2. Desktop research...................................................................................................... 10
   2.2.3. National consultations and dialogue ................................................................. 13
3. ECONOMIC PROFILE ........................................................................................................... 13
   3.1. Sectoral Profile ........................................................................................................... 13
     3.1.1. Primary Sector ........................................................................................................ 13
     3.1.2. Secondary Sector ................................................................................................. 15
     3.1.3. Tertiary Sector ........................................................................................................ 15
   3.2. Benchmarking the Country’s Pre-crisis Economic Performance................. 16
     3.2.1. National output and income ......................................................................... 16
     3.2.2. National accounts ............................................................................................. 18
     3.2.3. CURRENT ACCOUNT .......................................................................................... 20
     3.2.4. Capital account ................................................................................................ 21
     3.2.5. TOTAL NATIONAL INVESTMENT ........................................................................ 23
     3.2.6. Benchmarking the primary sector ................................................................ 24
     3.2.7. Benchmarking the secondary sector .......................................................... 24
     3.2.8. Benchmarking the tertiary sector ................................................................. 25
     3.2.9. Participation in international trade .............................................................. 25
     3.2.10. Labour force and employment ................................................................. 28
     3.2.11. Poverty levels................................................................................................... 31
     3.2.12. Summarised conclusions about the pre-crisis state of the economy
     in 2006 32
4. KEY FINDINGS: THE EMERGENT IMPACT OF THE GLOBAL ECONOMIC CRISIS .. 33
   4.1. Findings from the Baseline Survey of Employers ............................................... 33
   4.2. Impact of the Crisis on Macroeconomic and Sectoral Performance ...... 36
     4.2.1. Impact of the crisis on national output and income .............................. 36
     4.2.2. Impact of the crisis on national accounts .................................................. 37
     4.2.3. Impact of the crisis on national investment ............................................... 41
     4.2.4. Impact of the crisis on the primary sector .................................................. 41
     4.2.5. Impact of the crisis on the secondary sector ............................................ 42
     4.2.6. Impact of the crisis on the tertiary sector ................................................... 43
     4.2.7. Impact of the crisis on the country’s participation in international
     trade 43
   4.3. Impact of the Crisis on Employment, Poverty and Working Conditions ... 46
     4.3.1. Impact of the crisis on the labour force and employment ................... 46
     4.3.2. Impact of the crisis on working conditions ................................................. 47
     4.3.3. Impact of the crisis in terms of accessing the government safety net
     for unemployed workers ................................................................................................ 48
     4.3.4. Impact of the crisis on workers’ incomes .................................................... 48
     4.3.5. Impact of the crisis on poverty levels........................................................... 49
   4.4. Risks Facing the Economy as a Result of the Crisis .......................................... 49
     4.4.1. Risks in terms of economic and employment growth............................. 49
     4.4.2. Risks in terms of working conditions .............................................................. 49
5. POLICY RESPONSES TO THE CRISIS................................................................................... 50
   5.1. Measures taken by employers and workers organisations .............................. 50
   5.2. Government policy responses and measures taken thus far ......................... 50
     5.2.1. Government fiscal policies ................................................................................ 50
     5.2.2. Government trade measures ........................................................................... 52
     5.2.3. Government policies and programmes ........................................................ 53
     5.2.4. Government policies and measures to provide a safety net to
     retrenched workers ......................................................................................................... 54
     5.2.5. Government labour market policies ............................................................... 55
   5.3. Impact of Government policy responses and measures................................. 56
   6.1. Export opportunities to enhance external market access .............................. 57
   6.2. Investment opportunities to enhance foreign direct investment .................. 57
7. Conclusions ........................................................................................................................... 59
8. Recommendations for Appropriate Local Policies, Programmes and Action.. 61
•    References ......................................................................................................................... 62




                                                                                                                                           3
      INTRODUCTION


1.1.       Geographical, Population and Socio-economic Profile



Malawi Context
Malawi is a least-developed, landlocked
country situated in southern-central Africa.
It is flanked by Mozambique in the south-
east, the United Republic of Tanzania in
the north-east and Zambia in the west.
Malawi covers an area of about 118,500
km2, one third of which is covered by
water in Lake Malawi, Africa’s third largest
lake. Around three quarters of the
population live in rural areas and are
dependent on agriculture for their
livelihood. It is estimated that 73.9% of
Malawians earn less than $1.25 per day1.
However, such measures cannot fully account for hidden economic activity,
such as subsistence smallholders growing and consuming their own produce.

Agriculture in Malawi is characterised by a dual structure consisting of
commercial estates that grow cash crops and a large smallholder sub-sector
that is mainly engaged in mixed subsistence farming. Maize, the staple food,
accounts for 80 per cent of cultivated land in the smallholder sub-sector. Tea is
Malawi’s second largest export crop, behind tobacco. Other important export
crops are sugar (also imported into the UK) and coffee.
Political
Malawi adopted a democratic system of government in May 1994 after the
country’s first ever multi-party general elections, and has remained so until the
present day. Although there are divisions between the main competing parties,
the country has enjoyed relative peace and stability. In May 2009, Dr Bingu wa
Muntharika was re-elected President after popular reforms of the agricultural
sector in his first term.



1
    Human Development Index, UN, 2009, online at: http://hdrstats.undp.org/en/indicators/102.html
                                                                                                    4
Economy
Gross national income per capita (PPP international $), 20082
 UK                     South Africa                Malawi
 36,130                 9,780                       830

The current macroeconomic environment is fairly positive and stable,
contrasting with the previous record of years of soaring budget deficits and
erratic growth. Malawi has recorded respectable economic growth in recent
years, with the rate of growth of GDP increasing incrementally from low and
negative growth to high growth rates: -5% in 2001 to 7.9% in 2007, and 8.6% in
20083. However, this is in the context of extreme poverty and a low base
income.

    Malawi Data Profile 4
                                                                2000      2005       2007       2008
    World view
    Population, total (millions)                                11.62     13.23      13.92      14.28
    Population growth (annual %)                                2.9       2.5        2.5        2.5
    Surface area (sq. km) (thousands)                           118.5     118.5      118.5      118.5
    Poverty headcount ratio at national poverty
                                                                ..        ..         ..         ..
    line (% of population)
    GNI per capita, PPP (current international
                                                                610       640        760        830
    $)
    People
    Life expectancy at birth, total (years)                     46        47         48         ..
    Fertility rate, total (births per woman)                    6.2       5.8        5.6        ..
    Adolescent fertility rate (births per 1,000
                                                                160       145        135        ..
    women ages 15-19)
    Births attended by skilled health staff (% of
                                                                56        ..         ..         ..
    total)
    Mortality rate, under-5 (per 1,000)                         170       127        111        ..


2
  The World Bank Group (2009) online at:
http://siteresources.worldbank.org/DATASTATISTICS/Resources/GNIPC.pdf (Accessed 27th November).
3
   Central Intelligence Agency, The World Fact Book, https://www.cia.gov/library/publications/the-world-
factbook/geos/mi.html (Accessed 31 October 2009).
4
  The World Bank Group, (2009) online at:
http://devdata.worldbank.org/external/CPProfile.asp?PTYPE=CP&CCODE=MWI (Accessed 27th November).

                                                                                                       5
 Malnutrition prevalence, weight for age (%
                                                 22      18      ..       ..
 of children under 5)
 Immunization, measles (% of children ages
                                                 73      82      83       ..
 12-23 months)
 Primary completion rate, total (% of relevant
                                                 66      56      55       ..
 age group)
 Ratio of girls to boys in primary and
                                                 93      99      100      ..
 secondary education (%)
 Prevalence of HIV, total (% of population
                                                 13.5    12.3    11.9     ..
 ages 15-49)
 Environment
 Forest area (sq. km) (thousands)                35.7    34.0    ..       ..
 Agricultural land (% of land area)              43.5    48.8    ..       ..
 CO2 emissions (metric tons per capita)          0.1     0.1     ..       ..
 Economy
 GDP (current US$) (billions)                    1.74    2.86    3.59     4.27
 GDP growth (annual %)                           1.6     2.6     8.6      9.7
 Inflation, GDP deflator (annual %)              30.5    15.3    7.4      8.9
 Exports of goods and services (% of GDP)        26      20      24       23
 Imports of goods and services (% of GDP)        35      44      45       51

The extreme poverty levels mean that Government resources are often diverted
away from long-term beneficial economic development activities to meet
current social obligations. Government budget is supported through foreign aid,
resulting in aid inflows accounting for one quarter of the entire gross national
income.      Nevertheless, the Government’s agricultural subsidy programme
(subsidizing inputs such as fertilizers) has, coinciding with good weather over
recent years, been regarded as a success. The Government in 2009 also
engaged in price-setting for key crops such as maize and cotton: while prices
are nominally based on costs of production, the policy of price-setting has
disrupted traditional contract arrangements, causing delays in supply. The
outcome for the 2009 harvest is still to be evaluated but Imani Malawi is
monitoring developments.

As mentioned earlier, the Malawian economy is highly dependent on
agriculture, with many of the supporting services and industry revolving around
agricultural support and agro-processing.      Malawi’s high dependence on
agricultural commodities makes the country extremely vulnerable to external

                                                                                 6
shocks, like the vagaries of weather and the fluctuations in world commodity
prices.

1.2.   Country-specific context

Malawi ranks among the world's most densely populated and least developed
countries. Despite this its macroeconomic performance in recent years has
been impressive, with GDP growth rising to 7.95 percent in 2007, and 8.7 percent
in 2008 with 5.96 percent estimated for 2009.

The Malawian economy is heavily dependent on the rain fed agricultural sector,
which historically has been vulnerable to drought. The government’s national
fertiliser subsidy programme combined with ample rains across the country has
resulted in strong harvests in maize and other crops over the past few years. This
in turn has allowed inflation and interest rates to decline over the same period –
strengthening the macroeconomic environment.

Malawi has remained relatively insulated from the contagion effects of the
global financial crisis thanks to its limited integration with the global financial
system. However, the country is likely to suffer from second round effects of the
crisis arising from declining demand for its commodities, coupled with a
decrease in commodity prices. More significantly, the country experienced a
substantial terms of trade shock in 2008 due to high fuel and fertiliser prices
which has led to fiscal vulnerabilities and put tremendous pressures on
international reserves. These are the key structural weaknesses that the
government has to tackle if Malawi is to maintain its recent strong economic
performance.

GDP growth on average has been an impressive 8 per cent since 2005 and
reached 8.7 per cent in 2008. Sustaining this growth momentum, will be
challenging in the face of the current macroeconomic outlook and the current
global economic downturn. As a result GDP growth is forecast to grow at a
slower rate of 5.9 per cent in 2009. Despite this decline, Malawi is poised to
perform better than other Southern African countries. The graph below shows
GDP growth trends since 2000.



5
 Central Intelligence Agency, The World Fact book
6
  International Monetary fund, Malawi and the IMF, http://www.imf.org/external/country/MWI/index.htm
(Accessed 31 Oct. 09).
                                                                                                  7
Source: National Statistics Office and IMF data

In early 2008 Malawi experienced a sharp deterioration in terms of trade caused
by rapid increases in fuel and fertiliser prices. Fertiliser and fuel are Malawi’s top
two imports and represented about 14 percent7 of total imports in 2007. The
Malawi Government’s largest programme is the input subsidy highlighted above
that provides fertiliser to 1.5 million households across the country at a significant
discount to the world price (some estimates have it down to a third of the world
price). The increase in fertiliser prices added significant costs to this programme.
These unexpected price shocks threaten a fiscal and a balance of payments
crisis in the 2009/10 fiscal year. In more specific terms the increased costs of fuel
and fertiliser have created a $70 million fiscal gap which may, after further
analysis, prove to be even higher. This caused official foreign currency reserves
to fall considerably short of the targeted three months of import cover. It is
essential for Malawi to expand its export base with respect to both quantity and
diversity of goods. The limited supply of reserves will have an impact on business
expansion, which in turn will impact growth projections.

The main factors behind the decline in the level of foreign currency reserves
were: higher than expected imports, the terms of trade shock highlighted above

7
    Africa Economic Outlook, 2009
                                                                                    8
and over-borrowing relative to original fiscal targets. The interaction of these
factors with the pegged exchange rate forced the burden of adjustment onto
foreign currency reserves.

From a structural perspective the government continues to place substantial
weight on stabilizing the nominal exchange rate against the U.S. dollar. The
Malawian Kwacha has held steady against the dollar since May 2006 thanks to
efforts by the government to defend the exchange rate. However, the pegged
exchange rate regime has been a drain on international reserves. Even though
the terms of trade shock seems now to be improving, the rapid and sizable
appreciation of the U.S. dollar against the currencies of many of Malawi’s trade
partners may lead to a sharp rise in the real effective exchange rate. In turn this
would make sustaining robust growth and reaching reserve targets all the more
difficult. The authorities will have to re-examine the appropriateness of the
current exchange rate regime in light of the stated objective of promoting
export diversification.

The recent international down turn in commodity prices have caused fertiliser
prices to fall from a peak of $1220/ton earlier in 2008 and are expected to be
$770/ton in 2009.This will reduce the fiscal burden of the subsidy programme in
2009.

In response to the impacts of the terms of trade shock the government and
donors have introduced a new IMF programme to bolster reserves and
increased aid inflows. These have been front loaded to ensure that these
impacts are mitigated and spread over time rather than all coming at once and
allowing current poverty reduction expenditure to continue in the short term.
Malawi still remains vulnerable and at risk to price spikes in commodities. Fuel
alone accounted for 20 per cent of total imports in 2008.

Malawi’s main trading partners (the OECD and South Africa) have been directly
affected by the global economic downturn. Malawi’s top exports are
agricultural commodities: tobacco, tea, sugar, nuts, and cotton. Tobacco
dominates exports earnings, in 2008 registering a record $470 million. As a
relatively demand-inelastic good, Malawi’s tobacco exports may be insulated
from falling export demand.

Although Malawi is unlikely to be impacted directly by the global financial crisis,
second round effects may have significant impact. For example, the British

                                                                                 9
pound and other foreign currencies such as the Euro have depreciated against
the US dollar to which the Malawi kwacha is pegged. This has impacted in
Malawi Kwacha value of aid which has fallen considerably. Other negative
impacts such as delays in private sector investment, lower foreign direct
investment and lower remittance income may impact the economy in 2009. This
will be mitigated by the fact that the Malawi’s exports are dominated by sectors
that produce inelastic goods.



2. METHODOLOGICAL APPROACH AND ANALYTICAL FRAMEWORK

2.2.1. Baseline survey of employers

The baseline study/survey interviewed key sectors and groupings of the Malawi
which included producers, processors, parastatals, government banking,
financial sector, insurance, transport (rail transport), and agriculture. The
response demonstrated on key theme of the Malawi report is that few people
have seen or felt the effects (often unseen) of the crisis. The response rate has
been slightly low due to mild unseen effects. This has been so because of the
strong domestic policies the country has in effect meanwhile, such as strong
agricultural input subsidy programme which has facilitated bumper yields for the
past years, making Malawi food secure. Radical price setting and exchange
rate policies have also masked the effects of the crisis.


2.2.2. Desktop research

Though the impact of the world financial and economic crisis was initially
projected to be less severe in developing countries, the low income countries
are now experiencing the effects of the global downturn through various
channels including reduction of exports, lower remittances, lower foreign direct
investment, reduction in aid flows and weakness in financial systems8.

                               Systemic           Cross-border            Growth & trade
                               banking            financial flows         effects

8
  African Economic Conference, AfDB, The Global Financial Crisis Slowing private capital inflows and economic
growth                    in                    Rwanda                        and                     Burundi,
http://www.afdb.org/fileadmin/uploads/afdb/Documents/Knowledge/2009%20AEC-
%20The%20Global%20Financial%20Crisis%20Slowing%20Private%20Capital%20Inflows%20and%20Economic%20G
                                                          th
rowth%20in%20Rwanda%20and%20Burundi.pdf (Accessed 19 November 2009).
                                                                                                           10
                                crisis


             Advanced                    I                                              III
             countries
             Emerging                                          II                       III
             markets
             Less-                                             II                       III
             developed
             countries

The impact of the financial market crisis has so far been limited since Malawi
does not have a vibrant financial market, and the Malawian economy is only
indirectly and perhaps remotely related to it. The financial sector is small and less
sophisticated, with two major commercial banks namely National Bank of
Malawi and Standard Bank Malawi, out of nine, dominating the banking sector.
Foreign direct and portfolio investment levels are very low. However, most
commercial banks have reported difficulties accessing foreign credit lines9.
Furthermore, Malawi's economy is not driven by the housing market, whose
collapse has led to the collapse of banking sector and many financial
institutions before cascading into the real economies of the developed
countries, thus for short-run impact, there is not much that Malawi may lose.

Commodity price have declined sharply from recent peaks on expectations of
a sharp global downturn, as demand for commodities has weakened in tandem
with world economic activity10. Oil and, very important for Malawi, fertilizer
prices have fallen by over two thirds since their peak in mid-2008 with the falling
of shipping costs by 80%.

However, exchange rate movements in the west are having a negative impact
on foreign aid inflows to Malawi. For example, DFID’s inflows (in Malawi Kwacha
equivalent) have been reduced by about 25% due to a depreciation of the
British Pound against the US Dollar11. In this way, Malawi aid flows have reduced
even when the nominal dollar or GBP values are maintained.



9
           Country          Perspectives            on         the         Financial       Crisis:       Malawi,
http://siteresources.worldbank.org/EXTAFROFFCHIECO/Resources/khwima.pdf (Accessed 19th November 2009).
10
   IMF Survey M a g a z i n e V o l . 3 7, no. 12 (Dec 2008), More Action Needed to Combat Spreading World Crisis,
IMF Says, http://www.imf.org/external/pubs/ft/survey/2008/123108.pdf (Accessed 19th November 2009).
11
            Country          Perspectives            on        the         Financial       Crisis:       Malawi,
http://siteresources.worldbank.org/EXTAFROFFCHIECO/Resources/khwima.pdf (Accessed 19th November 2009).
                                                                                                               11
Again, given that the USA and the developed world are the major financiers of
the World Bank and many other institutions with activities in developing
countries, unless the western economies recover quickly, willingness to finance
the World Bank and other development institutions, and hence the developing
country (including Malawi) programmes will wither. So the shape of Malawi’s
economy will be affected by the multilateral and/or bilateral links the country
has with developed donor countries that are in the recession. Malawi might also
feel the hit through financial saving changes in the NGOs and many donor
funded programs. The other means through which Malawi could be affected is
through international trade given that some of Malawi's trading partners are
Western. In the face of the financial and economic meltdown, countries that
consume Malawi’s exports will revise their choice baskets given that they have
less purchasing power than before.            Also trade financing is increasingly
becoming scarce with foreign banks’ borrowing becoming more difficult and
expensive12. With financial markets hit, foreign direct investment, already small, is
likely to reduce in diversity and value since FDI investors have a shortage of cash
and it will be an issue attracting investors.

Key point: Reduced aid flow as a result of exchange rate movements




In the medium to long term, the second round effects of the financial crisis could
have a significant negative impact on Malawi through its impact on commodity
exports and remittances. Malawi’s productive sector may be affected through
reduced demand for the country's exports, mainly tobacco, sugar, and tea.
These exports are particularly vulnerable because the European Union (EU) and
the US are the principal destinations. While sugar has been good, Malawi is
dependent on preferential treatment; this is now at a greater risk. Further,
Malawi receives significant amounts of remittances from abroad which makes
up to around 4% of GDP13, crumbling of the developed economies that employ
Malawians will see a reduction of the remittances as there are currently massive
job losses in these economies. Therefore, a slowdown in the world’s economy
could yet have a significant negative impact on Malawi’s current account.



12
            Country        Perspectives       on       the        Financial         Crisis:      Malawi,
http://siteresources.worldbank.org/EXTAFROFFCHIECO/Resources/khwima.pdf (Accessed 19th November 2009).
13
            Country        Perspectives       on       the        Financial         Crisis:      Malawi,
http://siteresources.worldbank.org/EXTAFROFFCHIECO/Resources/khwima.pdf (Accessed 19th November 2009).
                                                                                                     12
2.2.3. National consultations and dialogue



In order to capture as much information of what is happening on the ground in
Malawi, successful in depth interviews with key sectors and national inter-trade
workshop/consultations were carried out targeting a variety of sectors. This was
done in conjunction with Employers Consultative Association of Malawi (ECAM).
The interviewees gave enlightening analysis from government, private sector
and parastatal perspectives. The main themes that came out during the face to
face interviews and the workshops included (1) lack of general information and
communication about the crisis from government. (2) Lack of understanding of
the impact due to strong domestic policies like agricultural subsidies and fiscal
policies. Domestic policies were seen as far more important. (3) A general lack
of major impacts of the crisis both on the economy and employment due to
underdevelopment of the financial market in Malawi and also government
monetary policies.

3. ECONOMIC PROFILE

3.1.       Sectoral Profile

   3.1.1. Primary Sector
The Malawi economy is heavily dependent on agriculture, which accounts for
over 80 percent of employment and represents about 80% of all exports. The
estate sub-sector, occupying about one-sixth of cultivated land, is a major
contributor to growth, employment and export earnings through tobacco, tea
and sugar production. The smallholder sub-sector is characterised by a small
number of ‘emergent’ farmers producing tobacco, maize and a range of other
crops such as ground nuts and cotton for the market. The Agriculture sector
contributes about 39.2% of the Gross Domestic Product (GDP)14. Tobacco
production is estimated to form 6 % of total GDP and 17 percent of agricultural
GDP15, representing 53% of total exports as at 2008. Recently, the mining sector
has also registered an upsurge in terms of exports and contribution to the GDP.
Changes in the international environment for nuclear power drove up uranium
prices, and the mean average of various estimates suggested that once
extraction was operating at full capacity in 2008, uranium could become

14
   Central Intelligence Agency, The World Fact Book, http://www.indexmundi.com/malawi/gdp_composition_by_sector.html
(Accessed 31 Oct. 09).
15
     FAO Cooperate Document Repository, http://www.fao.org/docrep/006/Y4997E/y4997e0i.htm (Accessed 31 Oct. 09).

                                                                                                                   13
Malawi’s second biggest export after tobacco, and account for 20 per cent of
exports and 5 per cent of GDP. However, Uranium prices have dropped as a
result of falling global demand and prices due to the crisis.

    3.1.1.1. Trends in the primary sector
The primary sector of Malawi economy has registered a strong growth over the
years as evidenced from its contribution to total GDP, with 39.2%16 in 2008. This is
supported by employment sectoral shift from formal back to informal agriculture
related employment, representing over 80% of employment in Malawi. Strong
agricultural policies have also seen a reduction of unemployment levels from 3%
in 2007 to 1% in 2008 and an encouragement of urban to rural migration due to
agricultural subsidy programme17. Government policies have also been pro-
primary sector development by setting minimum prices for main cash crops for
international prices, crops like tobacco and cotton, however falling global
demand and prices for traded goods has forced prices for these commodities
to go down.

Key point: Strong growth in agriculture has necessitated employment sectoral
shift from formal back to informal agricultural employment.




                    40
                    39
                    38
                    37
                    36
                                                                           Primary sector contribution to
                    35
                                                                           GDP (%)
                    34
                    33
                    32
                    31
                            2006         2007           2008




   3.1.1.2. Key industries in the primary sector
The primary sector of Malawi consists of two major sectors namely a) Agriculture
which is composed of tobacco, sugar cane, cotton, tea, maize, potatoes,
cassava, sorghum, pulses, cattle and goats. b) mining which is mainly covered
with uranium mining in the northern part of the country.


16
     Central Intelligence Agency, The World          Fact   Book,   https://www.cia.gov/library/publications/the-world-
factbook/geos/mi.html (Accessed 03 November 2009).

17
     Malawi Government – Ministry of Labour Annual Report (2008)
                                                                                                                   14
   3.1.2. Secondary Sector
Within the secondary sector, manufacturing (mainly agriculture based
processors) activities dominate, contributing 12.5 per cent to the total GDP18.
Manufacturing and distribution together account for 35.5% of total GDP.

    3.1.2.1. Trends in the secondary sector
Spill over growth from the agricultural sector rejuvenated the manufacturing
sector, which accounted for an estimated 12.1% of GDP in 2008 up from 11.9%
of GDP in 2007. Strong agricultural and domestic policies have seen a boost in
food and beverage processing fed from agriculture and has spilled into most of
the economic sectors which rely on it.

   3.1.2.2. Key industries in the secondary sector
Underpinning the above high growth in secondary sector has been strong
performances in tea processing, tobacco processing, meat processing, cotton
spinning and weaving and fertiliser manufacturing16 as well as trailer building.
However, Manufacturing firms tend to be locally focused with only 14% of output
exported. Growth in the distribution sector, also driven by higher agricultural
output, was estimated at 5.8% in 2008 from 5.5% in 2007. Other industries include
sugar; sawmill products, cement, and manufacturing of consumer goods.

Key point: Minimum price setting for key commodities for pro-primary sector
development, but has had an impact of purchases by secondary sector.




   3.1.3. Tertiary Sector
Within tertiary, the following sectors dominate: Electricity, gas and water supply;
wholesale and retail trade; Financial and Insurance services19.


   3.1.3.1. Trends in the tertiary sector
With stability established, growth diffuses out of smallholder agriculture into non-
tradeable sectors. The largest contribution to growth comes from agriculture,


18
       World    Economic     Forum,     The      Global     Competitiveness       Report     2008–2009,
http://www.weforum.org/pdf/GCR08/GCR08.pdf (Accessed 19th November 2009).
19
  National Accounts Figures From The September 2008 Business Interviews, 2008, Prepared by The Technical
Committee On National Accounts And Balance Of Payments.


                                                                                                     15
nearly all of which is attributed to the smallholder20. The sectoral pattern of GDP
confirms a lack of transmission during the period of macro-instability 1993-2003,
and from 2003 presents growth diffusing out of agriculture through to financial
services, distribution, transport & communications and eventually through to
construction.

    3.1.3.2. Key industries in the tertiary sector
Key industries in tertiary sector include transportation and storage which grew by
5.5% in 2007 due to improvements in passenger and freight haulage. Key
organisations are, for example, Malawi Lake services, AXA Bus company and
CEAR. There are various players in the freight subsector, which given projection
of 5.6% growth in 2009. The other sector is electricity, gas and water supply,
which registered a growth of 5.4% in 2008 from 4.7% in 2007. The wholesale and
retail subsector has seen a downward adjustment with further slowed down
growth in 2008. Increased patronage in the country’s hotels have also seen an
increase in the accommodation and food services whereas the information and
communication subsector started picking up in 2007 mainly on account of
improved performance of Zain Malawi. The other sectors that contribute to
tertiary sector include financial and insurance services and public
administration.


3.2.    Benchmarking the Country’s Pre-crisis Economic Performance

        3.2.1. National output and income
           Total GDP (2006)

2004 saw the macroeconomic performance of Malawi government improve
after several years of weak policy implementation resulting in anaemic growth,
spiralling domestic debt, accelerating inflation, and dwindling external reserves.
Low per capita growth also reflected recurrent drought and weak governance.
The government then improved policy implementation on a broad front21. This
saw Malawi registering a high total Gross Domestic Product of $10.07 billion In
2006, and since then, the trend has been upward going (see figure below). This
translated to 4.4 % real GDP change from 2004/2005.

20
   World Bank, 2009, Malawi Country Economic Memorandum Seizing Opportunities For Growth Through
Regional Integration And Trade, Volume I: Summary Of Main Findings And Recommendations.
21
   IMF, Malawi: 2006 Article IV Consultation and Third Review Under the Three-Year Arrangement Under the
Poverty Reduction and Growth Facility, and Request for Waiver of Nonobservance of Performance Criterion—Staff
Report; Staff Statement; Public Information Notice and Press Release on the Executive Board Discussion; and
Statement by the Executive Director for Malawi, http://www.imf.org/external/pubs/ft/scr/2007/cr07147.pdf
(Accessed 20th November 2009).
                                                                                                          16
                    12
                   11.5
                    11
                   10.5                                                     Total GDP(US$ billion)
                    10
                    9.5
                     9
                              2006             2007             2008


Figure: Total GDP

         REAL GDP GROWTH RATE (CONSTANT PRICES): 2005-2006
The high GDP growth rate in 2006 stems from a rebound in maize production
from the depressed level in 2005; the above-trend growth resulted from the
macroeconomic and structural policies implemented by the government22.
Malawi registered a Real GDP growth rate at constant prices of 8.2% in 200623.
The table below gives real GDP growth rates from 2006 through to 2009.




                                             2006          2007          2008               2009
Real GDP growth rate at
constant prices
                                             8.2%24        7.9%25        8.6%26            5.9 %( est.)27



NB: However, real GDP growth rate at constant prices for 2009 is projected to be
much higher than 5.9% of IMF. The government is projecting real GDP growth
rate of 9% for 200928.

22
    IMF, Malawi: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and
Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries—Staff Report;
Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for
Malawi, http://www.imf.org/external/pubs/ft/scr/2005/cr05285.pdf (Accessed 20th November 2009).
23
     Central Intelligence Agency, The World Fact Book, https://www.cia.gov/library/publications/the-world-
factbook/geos/mi.html (Accessed 31 October 2009).
24,20,21
         Central Intelligence Agency, The World Fact Book, https://www.cia.gov/library/publications/the-world-
factbook/geos/mi.html (Accessed 31 October 2009).


27
   International Monetary fund, Malawi and the IMF, http://www.imf.org/external/country/MWI/index.htm
(Accessed 31 Oct. 09).
28
     Malawi Government – Ministry of Labour Annual Report (2008).
                                                                                                            17
          Total Gross National Income (GNI) (2006)
Due to foreign ownership of companies in Malawi, such as Illovo sugar and
various tobacco companies, the GNI is less favourable to Malawi than other
measures.
          GNI per capita (constant prices) (2006)
Total income per capita in 2006 was $23029 pushing Malawi into one of the low
income countries with a small production base mainly dependent on
agriculture.

      3.2.2. National accounts
         Gross national expenditure in 2006
Malawi government had MK138, 705 million 30meant for national expenditure in
2006, of which MK48,053 million or 15.0 per cent of GDP, was spent on
development projects (i.e. agriculture and infrastructure development
programmes) of the nation. This was double of what 2004/2005 national budget
had set aside for development needs. This demonstrated government’s
commitment to development and was further illustrated by GoM’s efforts by
funding large road infrastructure projects from its own resources. Subsequent
years have seen Malawi’s gross national expenditure increase from year to year,
see details in table below




                                    2006              2007              2008            2009

     Gross             National MK 138 705 MK      172.8 MK 229.2 MK         256.8
     Expenditure                million31  billion32     billion33 billion34




29
    IMF Staff Position Note June 2009, The Southern African Development Community’s Macroeconomic
Convergence Program: Initial Performance,          http://www.imf.org/external/pubs/ft/spn/2009/spn0914.pdf
(Accessed 20th November 2009).
30
   2006/2007 Budget Statement Delivered In The National Assembly Of Malawi By Honorable G. E. Gondwe, Mp
Minister     of    Finance   at     the     New      State   House,     Lilongwe,     16th     June,   2006
http://www.finance.gov.mw/downloads/budget2006.pdf (Accessed 7th November 2009).
31
   2006/2007 Budget Statement Delivered In The National Assembly Of Malawi By Honorable G. E. Gondwe, Mp
Minister     of    Finance     at    the     New      State    House,     Lilongwe,    16th    June,   2006
http://www.finance.gov.mw/downloads/budget2006.pdf (Accessed 7th November 2009).
32
   /2008 Budget Statement Delivered In The National Assembly Of Malawi By Honorable G. E. Gondwe, Mp
Minister Of Finance At The New State House, Lilongwe, http://www.finance.gov.mw/downloads/budget2007.pdf
(Accessed 7th November 2009).

                                                                                                        18
The gross national expenditure has been rising over the years in tandem with
increasing tax revenues collected and increasing grants and budget support
from donor partners.

           Key expenditure items in 2006 national budget
Key on the GoM budget expenditure in 2006 were the following notable sectors:
Agriculture and food security which is a major contributor to Malawi GDP,
received MK16,817 million of the total budget, agriculture got the largest share
of the total budget in a bid to embark on GoM plan of making Malawi food
secure. This represented 12.2% of the total GDP in 2006, this budget included
agricultural subsidy which has seen an upward boost in the agricultural sector.
Irrigation and water Development got a share of MK2, 594 million out of the total
expenditure. Infrastructure development had a share of MK10, 501 million, with
Energy taking MK280 million which Government used to implement the Malawi
Rural Electrification Programme (MAREP) Phase Five involving the electrification
of 27 trading centers across the nation, Rural Development had a share of
MK386 million, Education had 14.2% of the total budget, being one of the
highest ratios in the SADC region, in total both universities and education
received MK20, 500 million. The health sector’s allocation was only marginally
lower than that of agriculture sector, total expenditure on health amounted to
MK22, 634 million which was 16% of the total expenditure for 2006 national
expenditure.

         Total tax revenue in 2006
The good macroeconomic and structural policies implemented by government
not only saw an increase in the GDP, but also an increase in the total tax
revenue which was projected at MK9,928 million which is a 16.8 per cent
increase over previous year’s tax revenue. The total tax revenue in 2006 was
MK74.4 billion35.

33
   2008/2009 Budget Statement Delivered in the National Assembly of Malawi by Honorable G. E. Gondwe,
Minister of Finance at the New State House, Lilongwe, http://www.finance.gov.mw/downloads/Budget2008.pdf
(Accessed 7th November 2009).
34
  2009/2010 Budget Statement Delivered in The National Assembly of Malawi By Honorable S. K. Banda, Minister
of Finance at the New State House, Lilongwe, http://www.finance.gov.mw/downloads/Bud2009.pdf (Accessed 7th
November 2009).
35
   Ministry of Economic Planning and Development (Malawi Government), World Economic Outlook, 2009,
Economic Report 2009 MEPD.
                                                                                                         19
          Tax rates in 2006
During this period, Malawi was one of the countries which had one highest tax
rate brackets within the SADC region. In 2006, the tax rate was 35%, however, it
has to be noted that the parliament sitting of 2006/2007 saw that tax rate
significantly reduced from 35% to 30%. The reduction in tax was in tandem with
aligning Malawi with other COMESA and SADC neighbouring countries and also
to attract more investors in the country.

      3.2.3. CURRENT ACCOUNT
      CURRENT ACCOUNT SURPLUS/DEFICIT (IN CURRENCY TERMS) IN 2006
Terms of trade shock between 2002 and 2005 put pressure on Malawi’s balance
of payments, making it to become negatively wide. But strong export growth
and a slowdown in import growth between 2006 and 2007, saw the narrowing of
the current account balance, which came to -$202.7 million from -$287.8 million
in 2005.

       CURRENT ACCOUNT SURPLUS/DEFICIT AS A PERCENTAGE OF GDP IN 2006
From 2004, the fiscal performance of Malawi has greatly improved despite
slippages in terms of reserve coverage owing to a number of factors, which
include much higher imports than projected, large cumulative terms of trade
declines, and less budget support than expected. Over-borrowing relative to
the initial fiscal targets was also a contributing factor. Lack of flexibility in the
exchange rate (exchange rate regime) interacted with these factors by pushing
the burden of adjustment on to reserves. International reserves have remained
too low considering Malawi’s vulnerabilities to weather, terms of trade (TOT),
and aid shocks, pushing Malawi to one of the countries with lowest import
reserves. However, increasing export growth and slowing down of import growth
has improved reserve coverage and improved current account balance deficit
in terms of GDP percent36. Improvement of reserve coverage is still continuing up
to now (2009).



36
  IMF 2008, Malawi: Sixth and Final Review Under the Three-Year Arrangement Under the Poverty Reduction and
Growth Facility, and Request for Waiver of Nonobservance of Performance Criteria and Augmentation Access—
Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for
Malawi, http://www.imf.org/external/pubs/ft/scr/2008/cr08265.pdf (Accessed 20th November 2009).




                                                                                                        20
        3.2.4. Capital account
        CAPITAL ACCOUNT SURPLUS/DEFICIT (IN CURRENCY TERMS) IN 2006
Controls on capital account transactions have for a long time been advocated
as a way to deal with financial and currency crises. Some countries facing
severe balance of payments problems have resorted to various controls on
capital outflows including taxing of funds remitted abroad, operating dual
exchange rates and outright prohibition of funds transfer. In other cases, controls
have been put in place on to capital inflows due to the harmful effects on
money and inflation. Malawi’s capital accounts - both inward and outward
direct and portfolio investments require prior approval, which means that
central bank approval is required before importing and paying for services.
Exporting of goods means that proceeds are surrendered to central bank which
then converts them to local currencies at an exchange rate determined by the
central bank. However, in the early 1990s, current accounts were liberalised
allowing exporters to keep up to 40% in Foreign Currency Dominated Accounts
(FCDA). Sixty per cent of export proceeds must be sold to an authorized dealer
bank upon receipt. The exporter may hold the balance in a foreign currency
denominated account for as long as required37. All inflows and outflows are
monitored by the central bank. Malawi continues to control capital account
transactions for several reasons38. Malawi’s export earnings are controlled by a
few firms mainly in tobacco, tea and sugar. Allowing these to hold and /or invest
outside the country would deny the country of the much needed foreign
exchange. As most foreign owned insurance companies are holding large
funds, which would readily flow out of the country to more lucrative and safer
investments, it is not certain that the country can benefit from income on such
investments. Political and economic instability in Africa brings in fear for capital
flight from Malawi as most local businesses and industries are owned by non –
indigenous Malawians and foreigners. And also because Malawi’s financial
market is underdeveloped, making it to have limited range of financial
instruments that can be trade rendering it incapable of handling especially
large volumes of short term capital flows39. These conditions pose a challenge
for full capital account liberalisation but they may have insulated Malawi
economy.


37
                      Reserve                      Bank                     of              Malawi,
http://www.sadcbankers.org/SADC/SADC.nsf/LADV/5E55E17D7121462442257545004758F6/$File/Malawi.pdf
(Accessed 23rd November 2009).
38
      Banda,    W.    T.,    2000,       Capital     Account    Liberation:   The Malawi Experience,
http://www.odi.org.uk/events/archive/banda.pdf (Accessed 23rd November 2009).
39
      Banda,    W.    T.,    2000,       Capital     Account    Liberation:   The Malawi Experience,
http://www.odi.org.uk/events/archive/banda.pdf (Accessed 23rd November 2009).
                                                                                                 21
Since 2006, the exchange rate has been kept stable as one of the means of
putting restrictions on the capital accounts. Favourable market conditions since
Malawi reached the HIPC completion point in mid-2006 have permitted the
Reserve Bank of Malawi to maintain a stable exchange rate. The bumper
harvests in 2006 and 2007 have resulted in attainment of important objective of
food self sufficiency, as well as easing pressures on the exchange rate at the
end of the crop cycle. In addition, the improvement in the macroeconomic
environment attracted substantial foreign capital inflows during the second half
of 2006. Spreads between official and the parallel market exchange rates
(reflected in rates offered by foreign exchange bureaus) have continued to
trend down until mid-200740. With this, Malawi has registered increasing capital
account balance as shown from the figure below.

Key point: The central bank has high control on capital account



                               Capital Account Balance (million US$)

                 350
                 300
                 250
                 200
                                                                         Capital Account
                 150                                                     balance(US$, millions)
                 100
                  50
                    0
                        2006     2007    2008     2009    2010


                Source: IMF




40
  IMF Country Report, Malawi: Fourth and Fifth Reviews Under the Three-Year Arrangement Under the Poverty
Reduction and Growth Facility, and Request for Waivers of Nonobservance of Performance Criteria—Staff Report;
Staff Supplement; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the
Executive Director for Malawi, http://www.imf.org/external/pubs/ft/scr/2008/cr0803.pdf (Accessed 23rd
November 2009).
                                                                                                          22
        3.2.5. TOTAL NATIONAL INVESTMENT

        TOTAL INVESTMENT IN 2006
Fiscal latitude before 2006 left the country with a high domestic debt burden.
This consumed a large share of government resources and diverting resources
from private investment. Moreover, key aspects of the economic infrastructure
deteriorated and pushed up the cost of doing business. However, the 2005/06
budget framework envisaged a large repayment of domestic debt41. In 2006,
Malawi faced foreign exchange shortages which persisted and had
deteriorated, raising the cost of doing business in Malawi, worsening the
investment environment, creating rent seeking opportunities, and possibly
aggravating good governance practices42. Unreliable power supply and
telephone services made new investments unattractive. And also weak public
institutions affected macroeconomic stability and hindered investment inflows.
In 2007, Malawi’s stronger macroeconomic environment (including its lower
external debt burden) and reforms to strengthen business competitiveness
helped attract more foreign direct investment and portfolio flows. Foreign
portfolio investors have already expressed interest in investing in government
domestic debt markets43. Due to strong macroeconomic performance, gross
investment increased to 20 percent of GDP in 2007 over the medium-term from
only 13 percent over the past decade44 which translates to US$ 1.39 billion.

In 2006/07 fiscal year, the government gave a high priority to enhancing growth
in order to ease the cost of doing business, the government introduced a single
business permit and a simplified business licensing fee structure that would,
among other things, treat resident and nonresident investors equally,



41
   IMF Country Report 2005, Malawi: Request for a Three-Year Arrangement Under the Poverty Reduction and
Growth Facility and Additional Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor
Countries—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the
Executive Director for Malawi, http://www.imf.org/external/pubs/ft/scr/2005/cr05285.pdf (Accessed 23rd
November 2009).
42
   IMF Country Report 2006, Malawi: First Review Under the Three-Year Arrangement Under the Poverty
Reduction and Growth Facility—Staff Report; Press Release on the Executive Board Discussion; and Statement by
the Executive Director for Malawi, http://www.imf.org/external/pubs/ft/scr/2006/cr0694.pdf (Accessed 23rd
November 2009).
43, 29,30
          IMF Country Report 2007, Malawi: 2006 Article IV Consultation and Third Review Under the Three-Year
Arrangement Under the Poverty Reduction and Growth Facility, and Request for Waiver of Nonobservance of
Performance Criterion—Staff Report; Staff Statement; Public Information Notice and Press Release on the
Executive       Board    Discussion;   and     Statement      by     the     Executive   Director   for    Malawi,
                                                                            rd
http://www.imf.org/external/pubs/ft/scr/2007/cr07147.pdf (Accessed 23 November 2009).

                                                                                                               23
establishment of an Investment and Trade Center and also a review of selected
commercial laws45.



       Total investment as a percentage of GDP in 2006
In 2006, gross investment as a percentage of GDP was 22.0 percent, of which
government’s investment added up to 7.7 percent and 14.4 percent of private
investment. The total saving-investment balance of -6.4 percent of the GDP: of
this, government’s saving-investment balance was -0.5 percent and private
saving-investment balance was -5.946.

      Nature of key investments (capital, financial etc.) in 2006
Major sectors of investment other than agriculture include telecommunications,
manufacturing, tourism, and mining. The principal destination for FDI in Malawi is
agriculture, most notably tobacco and sugar. Malawi had US$30 million of FDI
inflow in 2006, compared to US$7 million in 200347.The bulk of FDI inflows come
from the UK, the US, and South Africa, among others.


           3.2.6. Benchmarking the primary sector

      Contribution of primary sector to GDP in 2006
From 2003, there has been considerably good performance in agriculture which
has been diffusing into other sectors as well. Thus in 2006, 34.2%48 of the total
GDP was from the primary sector. The trend has been increasing positively. The
primary sector has remained the highest employment field in the country with
over 80% of employment and represents about 80% of all exports from the
country.

      3.2.7. Benchmarking the secondary sector
      Contribution of secondary sector to GDP in 2006
With agriculture starting to pick up around 2006, there has been a diffusing of
growth from the primary sector through to both secondary and tertiary levels of



46
     IMF, 2009, “Malawi - IMF Country Report No. 09/16”, International Monetary Fund, Washington, D.C
47
  Columbia University – SIPA, 2009, MCI and VCC Working Paper Series on Investment in the Millennium Cities,
Foreign Direct Investment in Blantyre, Malawi: Opportunities and Challenges,
http://www.vcc.columbia.edu/pubs/documents/FDIBlantyre-Apr09_000.pdf (accessed 30th November 2009).
48
     Malawi at a glance, http://devdata.worldbank.org/AAG/mwi_aag.pdf (Accessed 7th November 2009).
                                                                                                               24
the economy. Manufacturing industry grew from 11.9% to 12.5% contribution to
GDP in 2008.


       3.2.8. Benchmarking the tertiary sector
       Contribution of tertiary sector to GDP in 2006
In currency terms, sub-sectors in tertiary sector performed considerably well in
2006. Various sub-sectors had good growth rates in terms of contribution to GDP.

Sub sector                                        Contribution
Electricity, gas and water supply                 MK 5,638.0 million
wholesale and retail trade                        MK51, 247.9 million
Transportation and storage                        MK 12,700.0 million
Accommodation and food service                    MK 6,346.2 million
activities
information and communication                     MK 8868.4 million
Financial and insurance activities                MK 21, 923.5 million
Professional, scientific and technical            MK 5,683.4million
activities, Administrative and support
service activities
Public administration and defence                 MK 11,933.0 million
Source: National Accounts Summary


       3.2.9. Participation in international trade

           Total exports in 2006 and Percentage export growth from 2005 to 2006
Global trade and investment has expanded over the past several decades. In
Sub-Saharan Africa, however, a region hampered by political instability and
governance problems, lack of foreign investment, and other barriers hence the
opposite has occurred. Thus before 2006, Malawi’s external trade performance,
as measured by its trade balance, has remained unsatisfactory. The trade
balance has been in constant deficit and has progressively widened. In 2003,
total exports amounted to 44.8 billion kwacha (free on board) against imports of
70.4 billion kwacha. In nominal terms, exports showed an upward trend, largely
due to the depreciation of the kwacha, whereas in real terms exports declined,
both in volume and value (in US dollars), due to low tobacco sales that were
affected by cross-border trade, low prices, postharvest losses, high farm inputs
and high interest rates49.

49
  UN, United Nations Conference On Trade And Development 2006, Malawi And The Multilateral Trading
System:    The     Impact    Of      WTO     Agreements,     Negotiations    And   Implementation,
http://www.unctad.org/en/docs/ditctncd200518_en.pdf (Accessed 23rd November 2009).
                                                                                               25
However, in 2006, Malawi’s total exports jumped to $ 543.9 million (fob) from $
470.0 million in 200550 6.6 percent export growth in terms of export value growth.
Since then, exports have been increasing. Malawi’s exports jumped to $868.6
million in 200751. However, changes on the terms of trade (trade shocks) of 2008
have seen to it that Malawi’s export decrease to $679 million.

          Major export commodities in 2006
Malawi is an agrarian nation and this means that most of its exports are
agricultural based of which mainly include: tobacco, tea, sugar, cotton, coffee,
peanuts, wood products, apparel52. The figure below gives full details of major
export commodities for Malawi in 2006.



                 TOP 20 EXPORT COMMODITIES FOR MALAWI, 2006
Commodity Description                            Share of total exports
                                                 (%)
Tobacco                                                     61
Tea                                                          7
Sugar                                                        6
Cotton                                                       2
Men's or boy's suits                                         2
Jerseys, pullover, cardigans, etc                            1
Groundnuts                                                   1
Other nuts, fresh or dried                                   1
Maize (Corn)                                                 1
Dried leguminous vegetables                                  1
T-Shirts, Singlets and other vests                           1
Natural rubber and similar natural gums                      1
Sugar Confectionery                                          1
Men's or boy's shirts                                        1
Pepper of the genus piper, dried or crushed                  1
Electrical lighting or signalling equipment                  1


50
   IMF Country Report 2006, Malawi: First Review Under the Three-Year Arrangement Under the Poverty
Reduction and Growth Facility—Staff Report; Press Release on the Executive Board Discussion; and Statement by
the Executive Director for Malawi, http://www.imf.org/external/pubs/ft/scr/2006/cr0694.pdf (Accessed 23rd
November 2009).
51
   Malawi at a glance (2008), http://devdata.worldbank.org/AAG/mwi_aag.pdf (Accessed 7th November 2009).
52
   Economy, http://www.theodora.com/wfb2006/malawi/malawi_economy.html (Accessed 03 November, 2009).
                                                                                                          26
Other furniture and parts thereof                                           0.5
Plywood, veneered panels and similar laminated                              0.5
wood
Wood marquetry and inlaid wood                                              0.5
Coffee                                                                      0.4

Source: Adapted from Malawi Trade Statistics Brief 2006 Release53.

         Major export partners in 2006
On regional level, Malawi’s exports to the Commonwealth market were the
highest MK 43.9 billion, or 65 percent of total trade, 48 percent of total exports in
the year 2006. The second largest regional market is with SADC Countries, this
accounted for 50 percent of Malawi‘s total trade. On the other hand, the SADC
market accounted for 60 percent of total imports and 31 percent of total
exports. The main destinations of exports were South Africa, Mozambique,
Zimbabwe and Zambia. The EU market was the third largest accounting for 24
percent of total trade, 15 percent of imports and 40 percent of total exports.
With COMESA market coming fourth accounting for 26 percent of Malawi’s total
trade54.

            Total imports in 2006 and Percentage import growth from 2005 to 2006
From 2003 to 2007, Malawi’s imports have increased during the same period,
imports increased on average by 15.1 percent each year to US$ 1.4 billion. In
2006, total imports for Malawi were US$ 1 206.7 billion up from US$ 1 165.2 billion
in 200555.
            Major import commodities in 2006
Malawi’s imports are dominated by capital goods and industrial equipment. Of
these, the largest increases were in imports of petroleum products accounting
for 11 percent of total imports, followed by imports of motor vehicles 6 percent,
fertilizers 5 percent, passenger vehicles accounted for 3 percent, while vehicles
designed for transport of goods accounted for 2 percent56. Other import



53
 National     Statistics   Office     (NSO),     Malawi  Trade  Statistics Brief  2006    Release,
http://www.nso.malawi.net/data_on_line/economics/Trade%20on%20NSO%20website/Malawi%202006%20Trad
                                               rd
e%20Statistics%20Brief_Release.pdf (Accessed 23 November 2009).
55
   Malawi Imports: CIF, by origin. Exports: FOB, by last known destination Trade System: General,
                                                                     rd
http://comtrade.un.org/pb/fileFetch.aspx?docid=3019&type (Accessed 23 November 2009).
56
    Malawi Imports: CIF, by origin. Exports: FOB, by last known destination Trade System: General,
                                                                     rd
http://comtrade.un.org/pb/fileFetch.aspx?docid=3019&type (Accessed 23 November 2009).
                                                                                               27
commodities were food,                   semi   manufactures,      consumer        goods,     and
transportation equipment57.

          Major import partners in 2006
Malawi’s major trade partners on regional level include South Africa,
Mozambique, Zambia and Tanzania. Internationally, major import partners
include India, US, the EU and China.

           3.2.10.         Labour force and employment

         Labour force participation rate in 2006
The Welfare Monitoring Survey shows that national labour force participation
rate has declined slightly from 82% in 2005 to 81 % in 200658. Male Labour force
participation still remains higher than female. National unemployment rate
among 15 -24 year olds has not changed from 2005 to 2006 and that the rate for
females is higher than the males in both years. See table below

Table 7 – Main Employment Indicators 2002, 2005 and 2006

                                Census     Census WMS            WMS           MGD
INDICATOR                       1984       1998   2005           2006          INDICATOR
Labour Force
Participation Rate
Total                           65         66       82           81
Male                            67         67       86           86
Female                          64         65       79           79
Unemployment Rate
of 15 0 24 year olds
Total                           3          NA       9            9             Indicator 45
Male                            3                   8            8
Female                          1                   10           10


Source: Welfare Monitoring Survey 2006: NSO


               Total employment in the primary sector and employment in key
               industries in the sector in 2006.


57
         Countries      of       the       world,       Malawi         Economy        -       2006,
http://www.theodora.com/wfb2006/malawi/malawi_economy.html (Accessed 03 November, 2009).
58
     African Economic Outlook, 2007/08
                                                                                                28
In addition to the agriculture sector, it is estimated that the forestry sector
employs more than 9,000 in the formal sector (government, private and non-
governmental organizations) and further 20,000 in the informal sector mainly in
carpentry and pit sawing. A recent study found that the charcoal industry
provides significant employment in the various activities. It is estimated that
92,800 people owe their livelihoods to charcoal. This figure includes 46,500
producers, 12,500 bicycle transporters, 300 other transporters and 33,500
traders59. There are about 338 large-scale charcoal producers, who are fully
fledged businesses producing up to 500 bags per month and accounting for 38
per cent of the total charcoal coming onto the market in Malawi. Small scale
charcoal producers accounts for 35 percent while the medium-scale account
for 27 per cent of the total charcoal.

In 2008, the mining sector employed about 4,850 people, representing 49 per
cent increase over that record in 2007. The increase in the employment in the
mining sector in 2008 was also attributed to the construction of the Kayerekera
Uranium Mine in Karonga District. It should be noted that with regards to the
quarry stone sub sector, formal quarries account for only 435 of the employees
with the remainder being quarry stone hand knappers (artisanal).

                  Formal Employment in the Mining Sector 2008
Sub Sector                                            Workforce
Coal                                                     1,110
Cement Lime                                                96
Agricultural Lime                                         194
Quarry Aggregate                                         2,030
Cement                                                    348
Gemstones/Mineral Specimens                               176
Ornamental Stones                                          37
Clay/pottery                                              125
Terrazzo                                                  196
Other Industrial Minerals                                 538
Total                                                    4,850

Source: Ministry of Economic Planning and Development



59
  Ministry of Economic Planning and Development (Malawi Government), World Economic Outlook, 2009, Economic Report
2009 MEPD.

                                                                                                               29
        Share of foreign workers in the primary, secondary and tertiary sectors
Shortage of man power and skilled labour continued to facilitate inflow of
manpower from other countries due to the growing demand for various skills.
The recorded number of expatriates that were issued employment permits in
2006 was 1,01560. Most expatriate workers are in the managerial, professional
and technical categories, among others.
Reported Employment Permits for Expatriates by occupation of origin, 2007 and
2008.

                                                2007                   2008
            Profession              Number       As             Number As
                                                 percentage             percentage
                                                 of the total           of the total
        Accountant              17                         2.3      31               8
        Administrators          11                         1.5      15               4
        Agronomist               0                            0      3               1
        Medical                  0                            0     11               3
        Doctor
        Consultant              11          1.5      8                                             2
        Director                42          5.6     13                                             3
        Controllers             19          2.6      0                                             0
        Engineer                58          7.8     21                                             6
        Lecturer                14          1.9     17                                             5
        Manager               210          28.2     73                                            20
        Church                120          16.1     66                                            18
        Minister
        Project                 11          1.5      7                                             2
        Coordinator
        Teacher/Tutor           54          7.2     27                                            7
        Technician              15            2     69                                           18
        Volunteer               10          1.3     10                                            3
        Other                 153          20.5      2                                          100
Source: Ministry of Economic Planning and Development report

The figures above show that most expatriates in administration and
management fall under both secondary and tertiary sectors of the economy.

60
  Ministry of Economic Planning and Development (Malawi Government), World Economic Outlook, 2009, Economic Report
2009 MEPD.

                                                                                                               30
For example, a manager at food processing industry would be in secondary
sector whereas a manager at a financial institution would fall under tertiary
sector of the economy. All foreign employers must show evidence of capacity
building of Malawian staff to take their place.

         Unemployment rate in 2006
The National Welfare Monitoring Surveys (NWMS) for 2006 and 2007 showed the
national unemployment rates of 6 and 3.1 percent for the years 2006 and 2007,
respectively. The national unemployment rates for males and females in the
year 2006 were 5 and 7 percent, respectively. In 2007, the national
unemployment rates for the males and females were 4 and 2 per cent,
respectively.

In the 15 to 24 years category, the unemployment rates were 9 and 7 per cent
for the years 2006 and 2007, respectively. The disaggregation into males and
females in the 15 to 24 year category for 2006 indicates that unemployment
rates were 8 and 10 per cent, respectively. In 2007, the unemployment rates for
males and females for the 15 to 24 years category were 9 and 5 per cent,
respectively.


       3.2.11.      Poverty levels
          Proportion of the total population below the poverty line (based on UN
          definition) in 2006.
The past two decades have seen progress being made in fighting poverty. The
poverty head count has fallen from 54 percent in 1990 to 40 percent in 200661
and continued strong economic growth should support further reduction in this
figure. However, Malawi remains one of the poorest countries in the world with
an equally concerning income distribution.

               HDI index in 2006

The country’s vulnerabilities include poor nutrition and among the world’s
highest prevalence of HIV/AIDS, almost one million people are living with the
disease. Further, the country ranks 164 out of the 177 countries measured in the
Human Development Index and life expectancy has fallen to about 46 years.
HIV/AIDS has also generated separate categories of vulnerable groups; these
include households lacking adult labour or headed by elderly people or

61
     African Economic Outlook, 2009.
                                                                             31
children, and households with sick family members unable to maintain food
production. Women in many cases are faced with the burden of agricultural
production and caring for HIV/AID victims.

          Dependency ratios in 2006


       3.2.12.     Summarised conclusions about the pre-crisis state of the
              economy in 2006

During this time, Malawi is only coming out of starvation as a result of 2005 food
crisis and it is instituting new strategies and policies, with full growth impact not
yet seen fully by 2006. By this time, some strategies and policies that were put
into effect were such as Malawi Growth & Development Strategy (MGDS). The
overall objective of the Malawi Growth and Development Strategy is to reduce
poverty through sustained economic growth and infrastructure development62.
The short term objective of the country was to stabilize macroeconomic
performance with long term policy of shifting from social consumption to
sustainable economic growth and infrastructure development. While the key
government policy was to achieve food security, the government mandate was
not as strong on subsequent years. The relative underdevelopment of the
financial sector meant that recent innovations did not trickle down to the
Malawi.




62
   Malawi Government, Malawi Growth And Development Strategy 2006 – 2011, http://www.malawi-
invest.net/docs/Downloads/Malawi%20Growth%20&%20Development%20Strategy%20August%202006.pdf
             th
(Accessed 25 November 2009).
                                                                                         32
4. KEY FINDINGS: THE EMERGENT IMPACT OF THE GLOBAL ECONOMIC CRISIS


4.1.   Findings from the Baseline Survey of Employers

64.3 percent of respondents stated that so far the effects of the crisis on general
business situation in the country have been moderate. Both enterprise and
overseas markets were considered to have experienced a high or notable
impact.




It is anticipated that the situation will remain same in the next six months. 57.1
percent of the respondents said this.




                                                                                33
                   Up (%)       Same (%)    Down (%)      No answer (%)

Volume of          28.6         35.7        35.7          0
demand
Employment         14.3         71.4        14.3          0
Average selling    35.7         50          14.3          0
prices
Investment         35.7         42.9        21.4          0
Training           28.6         42.9        28.5          0
expenditure
Profit             21.4         35.7        35.7          7.2
Exports            21.4         0           0             78.6

Table gives the projections of respondents on some Economic Indicators, which
show relatively positive underlying trends, other than ‘profit’. A clear majority of
employers' organisations in the survey believe that the main economic
indicators will not be adversely affected by the crisis – moderate effect, leaving
most of the indicators the same. 71 percent expect same employment levels as
a result of sectoral shifts from formal work to informal agricultural work, with 14%
expecting an increase in employment due to continued agricultural subsidies.
In interviews, there was little evidence of a drop in employment.

Investment is expected to remain the same by 42.9 percent of the respondents
and a further 35.7 percent anticipate an increase in investment in their various
enterprises.
                                                                                 34
Government Measures

Lack of communication from government has however left most people neither
satisfied nor unsatisfied with what the government is doing about the crisis.




                                                                           35
4.2.    Impact of the Crisis on Macroeconomic and Sectoral Performance


     4.2.1. Impact of the crisis on national output and income

Since 2006, gross domestic product of Malawi has been increasing from a
benchmark of US$ 10.07 billion. Good domestic/agricultural policies saw an
increase in agricultural output which in turn rejuvenated other sectors of the
economy, like distribution and manufacturing which jumped from 11.9 % in 2007
to 12.5% in 2008. There has been remarkable diffusing of growth out of
agriculture, not only in manufacturing, but also through to financial services,
distribution, manufacturing, transport & communications and eventually through
to construction63. The figure below shows Malawi GDP since 2006.

                 12
                11.5
                 11
                10.5                                                Total GDP(US$ billion)
                 10
                 9.5
                  9
                         2006           2007           2008



Figure: Total GDP
Source: IMF

Good macroeconomic and structural policies implemented by the government
since 2006 have also seen a constant increase in real GDP growth rate. The
country registered a Real GDP growth rate of 8.2% in 2006. The trend has been
upward since then, however, IMF forecast for 2009 is much lower than the
projected real GDP growth rate from government, which is 9%.




63
  World Bank, 2009, Malawi Country Economic Memorandum Seizing Opportunities For Growth Through
Regional Integration And Trade, Volume I: Summary Of Main Findings And Recommendations.
                                                                                             36
                                         2006           2007           2008            2009
                                         8.2%64         7.9%65         8.6%66         5.9 %( est.)67
Real GDP growth rate at
constant prices

Central East African Railways (CEAR) also reported that there is a positive
development in terms of growth in terms of import and export trade currently as
compared to 2006. Of late, CEAR Malawi has registered some improvements, it
is bringing in (Malawi) key imports products like petroleum from Nacala in
Mozambique and there are a lot of other consignments for Petroleum Importers
Limited to bring in to Malawi. On the exports side, it is also transporting key
export products from Malawi to the world market. In particular, CEAR is
exporting Illovo (Malawi) sugar which has preferential access on the EU market.
CEAR noted that what all this means is that it is registering growth in terms of the
tonnage the transporter hauls.

   4.2.2. Impact of the crisis on national accounts
Malawi government had MK138, 705 million meant for its expenditure in 2006,
with over 15% of the total national expenditure committed to infrastructure
development projects. In subsequent years, the national expenditure has been
on the increase with budgets focussing much on poverty alleviation and
development – which have been called pro-poor budgets. Before 2006, Malawi
was one of the countries among the Highly Indebted Poor Countries (HIPC) and
had put in place good domestic policies and good fiscal management and
macroeconomic stability policies which saw it attain HIPC completion point in
August 2006. This and launching of MGDS and other policies rejuvenated donor
support. In subsequent years, therefore, there has been an increase in
budgetary support, increased tax revenue collection and grants. These, among
others, have seen an increasing trend in the gross national expenditure of the
country. The table below shows increasing national expenditure and increasing
tax revenue collected.


64,20,21
      Central Intelligence Agency, The World Fact Book, https://www.cia.gov/library/publications/the-world-
factbook/geos/mi.html (Accessed 31 October 2009).


67
   International Monetary fund, Malawi and the IMF, http://www.imf.org/external/country/MWI/index.htm
(Accessed 31 Oct. 09).

                                                                                                        37
                    2006                     2007                  2008                   2009
     Gross National MK 138 705               MK 172.8              MK 229.2              MK 256.8
     Expenditure    million68                billion69             billion70             billion71

     Total tax           MK69.2               MK86.002               MK107.3             K139.9 billion
     revenue             billion72            Billion73              billion74           (projection)75

There has been a general decrease in tax rates from 2006 as compared to the
rest of the period. The tax rate dropped from 35% in 2006 to 30% in 2007, which
has been maintained over the years. Reducing the tax rate bracket has been
good for Malawi, aligning it to other regional tax rate brackets and also, it has
been good by creating an enabling environment for trade and investment in
the country.

Key point: Tax revenue has risen along with expenditure during the crisis.




68
   2006/2007 Budget Statement Delivered In The National Assembly Of Malawi By Honorable G. E. Gondwe, Mp
Minister     of    Finance     at    the     New      State    House,     Lilongwe,    16th    June,   2006
http://www.finance.gov.mw/downloads/budget2006.pdf (Accessed 7th November 2009).
69
   /2008 Budget Statement Delivered In The National Assembly Of Malawi By Honorable G. E. Gondwe, Mp
Minister Of Finance At The New State House, Lilongwe, http://www.finance.gov.mw/downloads/budget2007.pdf
(Accessed 7th November 2009).
70
   2008/2009 Budget Statement Delivered in the National Assembly of Malawi by Honorable G. E. Gondwe,
Minister of Finance at the New State House, Lilongwe, http://www.finance.gov.mw/downloads/Budget2008.pdf
(Accessed 7th November 2009).
71
  2009/2010 Budget Statement Delivered in The National Assembly of Malawi By Honorable S. K. Banda, Minister
of Finance at the New State House, Lilongwe, http://www.finance.gov.mw/downloads/Bud2009.pdf (Accessed 7th
November 2009).
72
   2007/2008 Budget Statement Delivered In The National Assembly Of Malawi By Honorable G. E. Gondwe, Mp
Minister Of Finance At The New State House, Lilongwe, http://www.finance.gov.mw/downloads/budget2007.pdf
(Accessed 7th November 2009)
73
   Response Of The Budget And Finance Committee To The 2007/08 Budget Statement And Proposed Budget.
http://www.parliament.gov.mw/docs/committee_reports/Response%20to%20Budget%20Statement%2007-
                           th
08%20final.doc (Accessed 7 November, 2009).
74
    MALAWI GOVERNMENT 2008/09 BUDGET HIGHLIGHTS http://www.finance.gov.mw/downloads/budget.pdf
(Accessed 7th November, 2009)
75
   2009/2010 Budget Statement Delivered in The National Assembly of Malawi By Honorable S. K. Banda, Minister
of Finance at the New State House, Lilongwe, http://www.finance.gov.mw/downloads/Bud2009.pdf (Accessed 7th
November 2009).
                                                                                                          38
The current account balance of Malawi in 2007 saw an improvement, pushed
further to -$112.6 million from -$202.7 million benchmark of 2006, as a result of
strong export growth and reduced import growth76 (see graph below). This led
to a temporary improvement in the reserve coverage for 2007. However
changes on trade terms of 2008 have had a great impact on the balance of
payments, pushing the current account balance further down the line from -
$112.6 million in 2007 to -$335.5 million in 2008. On a positive note, the current
account balance is project to improve from -$335.5 million in 2008 to -$205.4
million in 200977 as a result of continued improvements in export growth and slow
down in import growth which is further cushioning a sharp decline in reserve
coverage.
                             Import and Export Growth (%)




Figure: Malawi’s import and export growths.
Source: IMF

However, trade changes of 2008 have seen the current account surplus/deficit
as percent of the GDP fall sharply, largely because of a 25 percent increase in
fuel prices in June 2008. The TOT deteriorated significantly in 2008, despite solid
growth in tobacco prices and export volumes and easing of world oil prices.

76, 20
     IMF 2008, Malawi: Sixth and Final Review Under the Three-Year Arrangement Under the Poverty Reduction
and Growth Facility, and Request for Waiver of Nonobservance of Performance Criteria and Augmentation
Access—Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director
for Malawi, http://www.imf.org/external/pubs/ft/scr/2008/cr08265.pdf (Accessed 20th November 2009).


                                                                                                          39
Nevertheless, high fertilizer prices and other world market prices for most of 2008
suggest the negative impact on Malawi’s 2008 trade balance.

                        Current Account Balance (GDP %)




Figure: Current account balance of Malawi (percent of GDP)
Source: IMF

Petroleum Importers Limited reported that as the crisis took effect, people
moved from gold to oil, the dollar weakened. On 7/11 the oil price rose to $147,
and Malawi had to use all its forex reserves to meet the bill. The country was
paying double the underlying rate. The effect of the crisis, therefore, was initially
positive, as the price in full came down significantly. However, the government
maintained prices at the pump and recovered finances.



Key point: volatile fuel and oil based products prices have affected Malawi
during the crisis.

The impact of the crisis could still be coming where Non Governmental
Organisations and government programmes will be shelved. Canadians (CIDA)
are pulling out of Malawi, to Mozambique. This is not clear if this is an effect of
the crisis, or a series of operational decisions, or whether real funding have been
reduced through the strong Kwacha.


                                                                                  40
Currently the ongoing effect of forex shortages has led to a fuel crisis in Malawi.


     4.2.3. Impact of the crisis on national investment
     There may have been limited impact on local investment but there is some
     evidence that levels of investment have been curtailed through foreign
     exchange shortages. It is very likely in particular that FDI flows to malawi –
     which have exhibited resilience in 2008 – will slow down more markedly.
     Despite still positive GDP growth rates in Malawi, various factors might exert a
     downward influence on FDI inflows.


     4.2.4. Impact of the crisis on the primary sector

     The primary sector contribution to GDP has been positive and increasing over
     the years from 2006. Good agricultural policies and government objectives
     put in place have been spearheading growth in the primary sector. The table
     below shows yearly contribution of primary sector to total GDP.

                                               2006                 2007                2008
       Contribution of primary              34.278               35.579                 39.280
       sector to GDP (%)

     With increasing prosperity in the primary sector, there has been an increase
     of employment in agriculture and of late, there is a sectoral shift of
     employment from formal to informal agricultural related employment. Thus,
     the general growth in agriculture has had a positive impact on employment.
     Unemployment levels have reduced from 3.1% in 2007 to around 1% in 2008
     due to the general growth in the sector81.



          Unemployment 2007                            3.1%
          Unemployment 2008                            1%




78
   Malawi at a glance, http://devdata.worldbank.org/AAG/mwi_aag.pdf (Accessed 7th November 2009).
79
   Malawi, Economy, http://www.malawiembassy-dc.org/Economy.html (Accessed 24th November 2009).
80
    Central Intelligence Agency, The World Fact Book, https://www.cia.gov/library/publications/the-world-
factbook/geos/mi.html (Accessed 03 November 2009)
81
   Malawi Government – Ministry of Labour Annual Report (2008)
                                                                                                      41
An interview with the Ministry of Labour indicated foreseen evidence that there
could be some layoffs, and more problems in the quality of employment
changes between sectors rather than in the unemployment figures. The
economy is not uniformly structured and everyone is trying to eke out a living
which translates into more informal employment in agriculture or subsistence
farming rather than unemployment.

“We are expecting problems in urban unemployment as people are laid off and
change to informal or subsistence agriculture. I would advise against reducing
agricultural subsidies and in fact, agricultural subsidies need to be continued
and strengthened. Food production is a key variable in inflation / CPI (consumer
Price Index). Food security is very important in a country as in enables people to
survive any shocks.”

So this is seen as a priority, and less worrying is any unemployment. Resilience is
the key factor. However, there is a general concern about quality of
employment and earnings in the informal sector/employment and the ability to
afford basic needs

    4.2.5. Impact of the crisis on the secondary sector
Malawi economy being agrarian, most of its trade depends on agricultural
output; therefore an increase in agricultural production has not only increase
sector contribution to the GDP, but also rejuvenated other sectors even in
secondary and tertiary sectors. Distribution services and manufacturing services
have increased tremendously following the primary sector surge. Manufacturing
industry has risen to 12.5 % in 2008, up from 11.9% in 2007; there has been an
increase in tobacco processing industry, tea processing industry, trailer building
industry and meat processing industry, which is a result of function of increasing
income from agriculture. The table below shows secondary contribution to GDP
for 2007 and 2008.



                                        2006               2007                2008                 2009
 Contribution of primary                                       11.9%82              12.5%83
 sector to GDP (%)



82
  Last, A. (2008). Economics Malawi: Mid-year economic review Strong economic performance, in a global context
83
  Porter, M. E & Schwab, K (2008). The Global Competitiveness Report 2008 – 2009, World Economic Forum,
Geneva Switzerland
                                                                                                           42
Plastico industries - plastic ware producer indicated that, demand for their
products is increasing with exports to neighbouring countries like Zimbabwe.

“Due to good trade, we are investing in a new factory with different products;
the machinery for the new factory is in transit in the meantime.”

Industries in the secondary sector also reported moderate effects of the crisis,
mainly due to forex shortage.

   4.2.6. Impact of the crisis on the tertiary sector
The tertiary sector is generally insulated because of low integration and high
domestic interest rates. These indicate how insulated Malawi has been from
external effects in the sector internationally.

Malawi, like all the other countries, could have experienced a recession but
strong government interventions in other sectors has alleviated potential
problems. However, the strong kwacha (exchange rate regime) that the
government has maintained has had negative impacts on the private sector in
that it has become difficult to get forex for purchasing machinery, materials and
various other items and services needed required.

                    CASE STUDY OF IMPACT OF FOREX SHORTAGE
Forex shortage in the country has an indirect impact on employment, on some
private institutions like large food processors. One such processor has three
categories of employees namely: Full time employees, Fort Night Basis and Daily
rate basis. This means whenever, the machinery is not working usually due to
difficulties in getting spare parts which are procured outside the country
(requiring forex); the daily rate basis employees are not hired. In turn, this goes a
long way affecting people’s income generation.

     4.2.7. Impact of the crisis on the country’s participation in international trade

In 2006, Malawi had just started implementing new strategies and policies after
the food crisis of 2005, which saw a significantly high increase in imports. Thus, in
2006, Malawi’s total exports jumped to $ 543.9 million (fob) from $ 470.0 million in
200584 and since then, exports have been increasing. Malawi’s exports jumped


84
  IMF Country Report 2006, Malawi: First Review Under the Three-Year Arrangement Under the Poverty
Reduction and Growth Facility—Staff Report; Press Release on the Executive Board Discussion; and Statement by
the Executive Director for Malawi, http://www.imf.org/external/pubs/ft/scr/2006/cr0694.pdf (Accessed 23rd
November 2009).
                                                                                                          43
to $868.6 million in 200785. However, changes on the terms of trade (trade
shocks) of 2008 have seen to it that Malawi’s export decrease to $679 million.

Trade balance increased from -$447.3 million in 2005 to -$392.1 million in 2006
which also saw an increase in exports for 2006 with 6.6 percent export growth in
terms of export value growth86. Export value growth has grown from 6,.6% in 2006
to 15.8% in 2007 and 19.2% in 2008, however due to trade shocks of 2008, there is
a projected reduction in export growth of 9.2%87 - the global demand and
prices are reducing hence the reduction.

Through national dialogue and consultation, it was stressed that Malawi mainly
exports agricultural products like tobacco, tea, and sugar. It has recently started
exporting uranium mined at Kayelekera in Karonga district, up north of the
country. However, due to the global crisis, prices and demand on the
international market are going down, which means for Malawi, its exports are
also falling. On a positive note, it was noted at the workshop, that sugar prices
and quota are still high on the EU market where Malawi sugar is given a
preferential access. Coupled with tumbling prices and demand on the world
market, the government’s policy of keeping the strong kwacha (exchange rate
regime), Malawi exports are facing low demand on the regional markets, as
they have become more expensive to access. This forces imported goods to be
cheaper on the local market than local products. The private sector noted that
owing to the crisis which has resulted into lowering of prices and global
demand, prices of uranium have gone down therefore Malawi government’s
reliance on uranium exports as a source of the much needed forex has to be
strongly reviewed.

Small producers and exporters however claim that they have not felt the effects
of the global financial and economic crisis. An interview with one company
revealed that business is still normal as demand for their products is becoming
high.




85
  Malawi at a glance (2008), http://devdata.worldbank.org/AAG/mwi_aag.pdf (Accessed 7th November 2009).
86,73
    IMF Country Report 2008, Malawi: Sixth and Final Review Under the Three-Year Arrangement Under the
Poverty Reduction and Growth Facility, and Request for Waiver of Nonobservance of Performance Criteria and
Augmentation Access—Staff Report; Press Release on the Executive Board Discussion; and Statement by the
Executive Director for Malawi, http://www.imf.org/external/pubs/ft/scr/2008/cr08265.pdf (Accessed 23rd
November 2009).

                                                                                                       44
“Our plastic bags are used throughout the country, and exported to Zambia,
Zimbabwe and Mozambique. Employment is still normal – the crisis has not had
an impact, or has not yet reached us. It might have hit South Africa as they are
more high-tech. Also multinationals such as Toyota, but there has been no
impact or change for us. As of now we have lots of orders and trade/business
has been normal. In other countries, there have been strikes due to the threat of
unemployment, whereas in Malawi, there have been strikes but probably down
to payments which could be evidence of inflation. Currently, we are employing
more and more due to high demand and exports for our products.”

However, with 2006 benchmarks, there have been minor changes in export
commodities from the agricultural dominated economy. Major export
commodities are: tobacco, tea, sugar, cotton, coffee, peanuts, wood products,
apparel88 with South Africa remaining the major trade partner. Other export
partners include regional groupings like COMESA, SADC, Commonwealth and
EU. Within SADC, main destinations of exports are South Africa, Mozambique,
Zimbabwe and Zambia.

From 2003 to 2007, Malawi’s imports have increased on average by 15.1 percent
each year. In 2006, total imports for Malawi were US$ 1 206.7 billion up from US$ 1
165.2 billion in 200589. The rise in imports since 2004 has been accompanied by a
change in composition skewed towards consumption. In real dollar terms,
consumption imports have increased by 86 percent, intermediate imports by 50
percent (mainly on account of fuel and fertilizer) and investment imports by only
29 percent. In 2006 at over 14 percent of GDP, Malawi’s current account deficit
was the highest of all comparator countries. The rise in imports reveals a strong
growth of consumption demand, which - despite natural protection - has not
created a significant response from domestic industry. Taken together with the
trade deficit and run down of reserves, this implies that the exchange rate is
overvalued. More recently, banks have been forced to ration foreign currency
to importers and the spread between formal and informal exchange rates has
widened to 30 percent.

Since 2006, Malawi’s imports have largely been dominated by capital goods
and industrial equipment. Of these, the largest increases has been in imports of
petroleum products accounting for 11 percent of total imports, followed by

88
  Economy, http://www.theodora.com/wfb2006/malawi/malawi_economy.html (Accessed 03 November, 2009).
89
 Malawi Imports: CIF, by origin.       Exports: FOB, by last known destination Trade System: General,
                                                                     rd
http://comtrade.un.org/pb/fileFetch.aspx?docid=3019&type (Accessed 23 November 2009).
                                                                                                  45
imports of motor vehicles 6 percent, fertilizers 5 percent, passenger vehicles
accounted for 3 percent, while vehicles designed for transport of goods
accounted for 2 percent90. Other import commodities are food, semi
manufactures, consumer goods, and transportation equipment91.

 Malawi’s major import partners have not changed significantly, with South
Africa still remaining the major trading partner South Africa, others include: USA,
Tanzania, India and regional groupings like COMESA, SADC and EU.

Through national consultations and dialogue, it was noted that with the global
financial and economic crisis, the Chinese have turned their attention to non –
USA and non-UK/European markets and instead are focussing on the emerging
markets (EM)/developing world (DW) where they are faring well over the crisis. In
Malawi, in particular, due to the strength of the kwacha, imports are getting
cheaper than locally made products - making them fail to compete on the
market. There is a perception that Malawi is, therefore, quickly turning into a
dumping site of cheaper and substandard products mainly from China.

“There is need for the government to come up with policies to control the
importation of cheap substandard products from china (dumping issue).
Government needs to come up with protectionism policies for local products
and industries thereby promote and protect the local industry and economy.”

Key point: The crisis could be exacerbating the perception of Chinese imports
and making protective measures more likely.


4.3.    Impact of the Crisis on Employment, Poverty and Working Conditions

     4.3.1. Impact of the crisis on the labour force and employment
     There is no discernible effect on labour force and employment directly
     attributable to the crisis. Both Interview and national consultations and
     dialogue established this Petroleum Importers Limited (PIL) along other
     private and public institutions claimed not seen any impact on employment
     yet. Labour statistics indicate a reduction in unemployment levels from 3.1%


90
    Malawi Imports: CIF, by origin. Exports: FOB, by last known destination Trade System: General,
                                                                     rd
http://comtrade.un.org/pb/fileFetch.aspx?docid=3019&type (Accessed 23 November 2009).
91
   Countries of the world, Malawi Economy - 2006,
http://www.theodora.com/wfb2006/malawi/malawi_economy.html (Accessed 03 November, 2009).

                                                                                               46
   in 2007 to 1% in 2008 as a result of people engaging in self employment and
   subsistence farming.

   “We have not seen any impact on employment yet and looking at the
   population, most people are self-employed or are in subsistence farming.
   We are not fully integrated with financial markets – we go with our little
   baskets when our friends are bringing in Lorries.”


   4.3.2. Impact of the crisis on working conditions

According to ministry of labour, there are expectations of employment problems
in urban employment as people are being laid off, who are shifting to informal
agriculture related employment or subsistence farming. This poses concerns
about quality of employment and earnings as there is no unemployment
insurance in the country.

According to ministry of labour, around 85% of people are in subsistence
farming; “this turns out to be the vulnerability point. There is need to sustain
maize production. However, the crisis could affect the ability to afford
agricultural input subsidies and procurement of fertilisers (through imports) as
more and more people are shifting into informal agriculture employment.

In tandem with Ministry of Labour’s concerns about quality of employment,
some government parastatals are already facing these problems. An interview
with the Blantyre Water Board, a parastatal revealed that before the crisis came
into being, there were career advancement schemes for employees; these
have been put on pending until the budget of 2011, especially for training that
takes place outside the country. The board also supported career
advancement towards the attainment of an education qualification in the
country’s universities, but that also has been put on hold until July 2010 on
condition that financially the board becomes stable. Currently, only refresher
courses are allowed and supported by the board financially, the maximum time
available being only 4 weeks.

The board is currently undergoing a restructuring process, but the exercise is
meeting resistance from management, this means that if the restructuring can
be approved, some people may lose their jobs.



                                                                             47
Payment of gratuity has also been put on hold from July of 2009 until further
advice is given – all these are coming due to financial and economic
constraints currently looming over the Blantyre Water board.


  4.3.3. Impact of the crisis in terms of accessing the government safety net for
         unemployed workers

  Sectoral shift from formal to informal agriculture work has increased the need
  for more of subsidized agricultural inputs; this therefore calls for increased
  forex for procurement and importation of inputs. However, there is a concern
  about quality of work and earnings from agricultural related work. As
  earnings from subsistence farming are usually low, concerns are over
  affordability of items.

  4.3.4. Impact of the crisis on workers’ incomes
  The strength of agricultural subsidies which have resulted into self
  employment for most people in the country, are obscuring people’s
  perception of the crisis in terms of income levels. There does not yet seem to
  be any discernible impact on employment levels, however, many
  respondents anticipated layoffs as a possible second wave effects. Most
  companies and institutions have ensured that they waive retrenchments
  which may in turn affect people’s income. Instead they have delayed
  recruitments and allowed natural exits or relocation of labour force where
  demand in one sector has gone down.

  G4S - a security service provider reported that “the general impact of the
  crisis on the economy in Malawi is that laying off people means increased
  poverty at household level and also reduced revenue collection on the part
  of government, especially in terms of tax (PAYE). In general,
  financial/economic crisis has had a negative impact in that most
  international clients are cutting their demand for security services and this in
  turn leads to job losses on the guards. However, so far, G4S has never had job
  losses and it’s trying to contain the situation in that whenever there is
  demand cut in one area, the guards are always relocated to some other
  places where their services are required. Laying off people should be the last
  resort. On the same note, to lessen the effects, G4S is trying to get some new
  markets for the services locally despite the stiff competition that is there in
  Malawi, its doing this as mitigation to the crisis in the enterprise.”


                                                                               48
      Key point: there is little sign of retrenchments but delayed recruitment is
      reported.




   4.3.5. Impact of the crisis on poverty levels

   Malawi, like all other poor countries, gets foreign aid from richer nations, but it
   cannot be expected that current levels of aid can be maintained as donor
   nations themselves go through financial crisis. As such the Millennium
   Development Goals to address many concerns such as halving poverty and
   hunger around the world will be affected. However, various sectors have
   noted that sustainance of agriculture inputs subsidy would help contain the
   situation.


   4.4.   Risks Facing the Economy as a Result of the Crisis

   4.4.1. Risks in terms of economic and employment growth

The survey and national consultations and dialogue suggested that there is little
risk to the both the economy and employment, though this could be delayed.
High economic growth over the period may yet mask the negative effect of the
crisis. However, there is evidence across different sectors that employment
growth has been constrained. Again, formal employment growth has been
impacted by the trend towards agricultural employment.

   4.4.2. Risks in terms of working conditions

The risk in terms of working conditions is that sectoral shifts from formal work to
informal work poses a risk in terms of quality of employment and earnings from
informal sector, especially for those shifting from “modern” to “traditional” in line
with urban to rural migration. This risks undermining the government’s MGDS
goals of transforming into a manufacturing economy. Rural working conditions
tend to be less well regulated with greater hazards and less access to modern
services.




                                                                                   49
5. POLICY RESPONSES TO THE CRISIS

5.1. Measures taken by employers and workers organisations
The graph below gives an outline of the measures taken by employers and
worker organisation in response to the crisis.




5.2. Government policy responses and measures taken thus far

5.2.1. Government fiscal policies

Fiscal policies have kept consolidated domestic debt below 13 percent of GDP,
down from 14.5 percent in 2007. To ensure that borrowing is consistent with debt
sustainability objectives, new external debt management guidelines have been
issued and continue to strengthen debt management practices. Program
                                                                              50
conditionality is limited to areas critical for near-term adjustment to the shock.
Targeted domestic borrowing in 2008/09 is 1.4 percent of GDP lower than it was
in 2007/08. The government is adhering to the original domestic repayment
target for 2008/09 despite a rise of US$70 million (1.7 percent of GDP) in fertilizer
subsidy costs and higher than budgeted domestic interest payments (0.2
percent of GDP). The gap is being covered by higher-than-envisaged tax
revenues (0.8 percent of GDP), about US$42 million (0.8 percent of GDP) of
additional budget support, and spending cuts (0.4 percent of GDP)92. The
program adjusters are set to allow the government to avoid some spending cuts
if further budgetary support is forthcoming. On the other hand, the adjusters for
shortfalls in budget support have been tightened to protect reserves. The
strengthening fiscal position since 2005 has supported macroeconomic stability,
lower domestic debt and interest rates, and policy credibility. Reflecting these
improvements, Malawi has experienced sizable external debt relief and
increasing inflows of aid. Growth has been very strong, averaging 5.8 percent
for 2004–07, and in 2007 inflation declined to its lowest level in a decade. Higher
revenues and aid and lower interest payments on the public debt have
translated into an increase in outlays for poverty-reducing and social
expenditures and, with more rapid growth, into progress toward many of the
millennium development goals (MDGs).

However, the fiscal performance of the central government budgetary
operations worsened93 during the 2008/09 fiscal year compared to the previous
fiscal year. This was largely on account of worsening terms of trade that
affected the budget during implementation. Increase of the petroleum prices
on the international market led to soaring of the fertilizer prices. Forward
contracts continued to affect the budget even after global petroleum prices
had stabilized at significantly low levels.


Key theme: Government has                        strong     fiscal    policies     to    stabilize     the
macroeconomic performance


Monetary and exchange rate policies


92
   IMF Country Report, 2009, Malawi: Request for a One-Year Exogenous Shocks Facility Arrangement—Staff
Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Malawi,
http://www.imf.org/external/pubs/ft/scr/2009/cr0916.pdf (Accessed 26th November 2009).
93
    Ministry of Economic Planning and Development (Malawi Governement), World Economic Outlook, 2009,
Economic Report 2009 MEPD.
                                                                                                         51
The exchange rate regime has been geared towards moderate and stable
inflation—in particular a credible inflation rate in the neighborhood of 5-7
percent in the medium-term. This saw Inflation rate declining to a single digit
from 13.9 per cent in 2006 to 7.9 per cent in 200794. This is done with a view to
cementing macroeconomic stability and setting the stage for sustained growth.
However, with forex shortages, the high exchange rate regime the government
has been maintaining has brought about negative impacts in terms of export
credit.

With Malawi’s external prospects remaining positive coupled with two
successive bumper yields, have permitted substantial maize exports, and higher
aid inflows in 2008. The central bank has taken advantage of these
circumstances to increase the external reserve import coverage from 1.3 in mid-
2007 to at near 2 in mid-2008, which still continues to grow.

Financial Sector Development
Among various developments in the financial sector, the GoM has developed a
strategy to eliminate the losses that emerged last year at the central bank.
These losses emerged for various reasons, including fiscal discipline that lowered
the inflation tax, more efficient cash management at the Treasury and the cost
of financing increases in external reserves. The strategy will permanently ensure
the Reserve Bank of Malawi’s (RBM) financial independence and end its
reliance on the budget. It incorporates two elements: (i) the operational
restructuring of the RBM to reduce its administrative costs, especially for printing
and coining the currency; and (ii) the transfer of financial instruments from the
Treasury to the RBM. The amount of such instruments issued would be
substantially higher than any operating losses that may persist after operational
restructuring. This will over time increase the capital of the RBM and thus ensure
the progressive elimination of any such losses. The RBM is implementing a
comprehensive review of its costs and has already identified an initial round of
cuts. Financial restructuring will involve transferring securities (Treasury bills) to the
RBM such that it can conduct monetary policy operations without impairing its
income position, from March 2008.


5.2.2. Government trade measures
Despite the increased entry of cheap imported products, which may be
suppressing the local industry, there has been no significant protectionist
94
   Ministry of Economic Planning and Development (Malawi Government), World Economic Outlook, 2009,
Economic Report 2009 MEPD.
                                                                                                52
response by the government. Maintenance of a strong kwacha (exchange rate
regime) by the government has brought about opportunities for imported goods
to become cheaper in the country. Through dialogue, it was noted that the
government needs to take measures to control the importation of products
which are considered to be of lower standards. Some of the measures
suggested include: coming up with protectionist policies to make Malawi a free
dumping zone by stepping up requirement standards; policing to watch out for
substandard goods on the market; and also protect and promote local
investment.

However, recent macroeconomic and agricultural policy decisions, on a
negative note, have risked deteriorating the agricultural incentives in Malawi
and of weakening the production response of farmers to price signals. These
include a decision by the government to maintain a parity exchange rate to the
US dollar in the face of a sharp appreciation against most of Malawi’s
agricultural markets: the EU, South Africa, and its neighbors Tanzania, Zambia
and Mozambique. This has led to a significant appreciation of the kwacha
which will deteriorate farm gate prices for both exportables and importables.
Malawi farmers will be less able to compete domestically, regionally and
globally at these appreciated exchange rates. In addition, the government
restricted private trade in maize marketing in September.


5.2.3. Government policies and programmes

The Government through MGDS identifies six key priority areas that define the
direction the country is taking to achieve economic growth and wealth
creation. Government is concentrating its efforts on these key priority areas in
the medium term in order to achieve its overall policy objective of economic
growth as a means of reducing poverty in the country. The six key priority areas
are: agriculture and food security; irrigation and water development; transport
infrastructure development; energy generation and supply; integrated rural
development; and prevention and management of nutrition disorders, HIV and
AIDS.

The key priority areas of agriculture and food security; transport infrastructure
development; energy generation and supply; and irrigation and water
development; emphasize Government’s commitment to achieving immediate
economic benefits that would translate into the socio-economic well-being of
people in the medium-term. The key priority area on integrated rural
                                                                               53
development comprises elements of sustainable economic growth,
infrastructure development and governance. This reflects Government’s
commitment to improving lives of the rural poor through economic
empowerment and the development of rural growth centres. The key priority
area on the prevention and management of nutrition disorders, HIV and AIDS
emphasizes Government’s commitment to achieving its social development
objectives.

Government policies that ensure the achievement of its programmes include
agricultural subsidy policies, which translate into the main driving forces of the
economy. Price setting on key commodities also ensures that smallholder and
commercial get a fair deal for the produce. Controls on foreign exchange
policies insulate the economy from, among others, unstable inflation rates. The
government also controls policies on tobacco which is the main forex earner of
the country.

The macroeconomic framework for the MGDS is based on the government’s
commitment to the Poverty Reduction and Growth Facility (PRGF). Government
is, therefore, committed to pursue sound economic policies geared at
increasing and sustaining economic growth, reducing inflation rate, maintaining
flexible exchange rate and improving foreign reserve position. In addition,
increasing employment and improving the trade balance by enhancing the
country’s export capabilities.

The continued implementation of PFM reforms also ensures the increase in
public sector’s effectiveness and productivity. The PFM action plan is geared to,
among others, give a high priority to establishing the cash flow planning system
to facilitate the Government’s projection of receipts and expenditures
throughout the fiscal year and support better projections of domestic interest
payments.


5.2.4. Government policies and measures to provide a safety net to retrenched
workers

Vast majority of Malawians depend on subsistence farming, the policy focus for
promoting safety nets has taken the form of support of agriculture subsidies and
minimum price setting. Some districts have been engaged in trialing social cash
transfer systems and retrenched workers are entitled to severance allowance

                                                                               54
from paid employment. However, this remains on a small portion of the Malawi
workforce.

5.2.5. Government labour market policies

The Ministry of Labour and collaborative partners continue to support
harmonious labour relations, employment services and skills development for the
enhancement of socio-economic development in the country through
sustainable economic development, social justice and peace, social
development, social protection and quality assurance on skilled human
resources in the labour market.

The Ministry continues to conduct labour inspections in the country in order to
enforce labour legislations and monitor labour market dynamics The Ministry
conducted integrated labour inspections in October 2007, January, 2008 and
February, 2008 under the Modernization of Labour Inspections Project. During
the inspections a number of infringements were discovered and these include
lack of holidays; unpaid overtime; absence of written terms of conditions of
employment; unattended water and sanitation problems especially in shops;
locking up of workers in bakeries at night; lack of funeral management policies;
lack of HIV and AIDS policies; and presence of sexual abuse, among others. A
total of K1.4 million on holidays and overtime was paid at the spot witnessed by
labour officers during the inspections. Labour inspections have amicably settled
labour complaints and salvage lost or unpaid wages arising from problems in
employment contracts.

In respect to the right to association and freedom to organize a collective
bargaining, the ministry continues to register unions the total number of
registered unions in the country of 28. In terms of collective bargaining
agreements, there are 27 agreements are in force. The trade testing services are
crucial to skills development and quality assurance. In view of this, the Ministry
issued 1,789 trade test certificates and examined 6,411 artisans and this
exceeded the target of 1,200 artisans in 2008. In order to fill gaps in areas where
there is shortage of skilled labour and workforce, the government continues to
give work permits to expatriate workers as Malawi continues to experience
inflow of manpower from other countries due to the growing demand for skilled
manpower amid shortage locally. The recorded number of expatriates that
were issued employment permits in 2006, 2007, and 2008, were 1,015, 745, and



                                                                                55
365 respectively95. Most expatriate workers are in the managerial, professional
and technical categories, among others.

5.3. Impact of Government policy responses and measures

Apart from taking business as usual approach, the government has made few
official responses to the crisis. This has frustrated some respondents who would
have preferred more information on possible effects as the crisis deepened;
however, it could be argued that the bullish approach to exchange rate policy
was made possible by the wider effects such as a prolonged weak dollar.




95
   Ministry of Economic Planning and Development (Malawi Government), World Economic Outlook, 2009,
Economic Report 2009 MEPD.

                                                                                                56
6. Existing Opportunities to Stimulate the Local Economy

Reductions in import costs are an important opportunity to the local economy to
stimulate local economic growth. For an agricultural based economy like
Malawi, it has to import most of its capital goods and industrial equipment,
mostly farming equipment and fertilisers for maximum productivity. Current
falling prices on the world market means cheaper import costs and cheaper
imported goods such as steel and machinery. However, across the-board
challenge is securing foreign exchange. The problem of limited foreign
exchange affects the entire farm to market chain. For example, the rationing of
foreign exchange directly affects the sectors ability to expand, as new plant
equipment requires access to foreign exchange. The second largest expense
item for all industry participants is imported packaging materials, which again
requires regular and timely access to foreign exchange. Other product critical
inputs are equally essential for extending their product lines and for diversifying
into new product categories. Conversely, the protection of subsidies despite the
high burden purchasing foreign fertiliser and other inputs has continued to
stimulate local growth. The CEM report 2009 suggests that the growth in maize
has had little effect on GDP growth, however, we consider this to undervalue
the hidden multiplier effects (e.g. nutrition, educational benefits) that this policy
has brought about.

6.1. Export opportunities to enhance external market access
The strong food security as a result of strong agricultural subsidies the country is
currently implementing is a great opportunity to enhance external market
access by exporting surplus yield of maize and other crops. However, shortage
of forex the country is experiencing is damaging the exports. Also the strong
exchange rate regime is making Malawi exports to be expensive on both local
and external market, making them fail to compete with other regional exports.
Devaluing the kwacha is an opportunity that Malawi can take in order to
enhance external market access for its exports.

6.2. Investment opportunities to enhance foreign direct investment


Shortage of forex and maintenance of strong kwacha are a threat to the
enhancement of foreign direct investment for Malawi. Making the exchange
rate flexible would be attracting to investors. Increasingly high levels of control
on capital and currency movements have, it is feared, alarmed potential
investors and in the long run may lead to capital flight. The high exchange rate


                                                                                  57
relative to 2006 has meant that even the same nominal dollar investment is
lower in 2009.




                                                                        58
7. Conclusions

The effects of the global financial and economic crisis have been less
pronounced than in developed economies, emerging economies and even
most LDCs. Respondents to this study gave the clear message: that they have
not seen significant effects of the crisis on Malawi.

However, there have indeed been effects, but they have to a large extent been
masked by the effects of very strong domestic policies, combined with
favourable prices on tobacco (at least until 2009). Malawi’s reliance on primary
agriculture, and the large secondary food processing sector emerging from it,
has meant that the beneficial effects of agricultural subsidies have been
significant. Not only has the GDP growth dwarfed potentially negative effects
from a drop in demand from more developed economies – Malawi’s more food
secure is a sufficiently high priority that other negative economic considerations
are often tolerated or ignored. Across the agricultural sector, key commodities
have been controlled through minimum pricing, leading to damaging effects
on the cotton industry in particular, and foreign exchange shortages have
become increasingly difficult. Nevertheless, these are seen as secondary to
food security for Malawi, where so many people have been vulnerable to
malnutrition and starvation in previous years (particularly from 2000 to 2005). The
crisis has not sufficiently impacted on these core aims to have generated a
perception that Malawi has been adversely affected.

The tertiary sector in Malawi, including banking which in other countries has
been susceptible to shocks during the crisis, was notably underdeveloped prior
to the crisis, and remains so in 2009. Many financial products are unavailable in
Malawi (such as different types of business financing) that are provided by the
same banks even in comparable countries like Zambia. The banks have run on
an endogenous lending system with high interest rates, and most businesses
have found a variety of alternative methods of financing. The result is that there
has been only a mild impact in the tertiary sector, with tightening on credit
finance but to a degree that is masked by far more pressing monetary
constraints such as a lack of foreign exchange.

The Government of Malawi has not publicly discussed the crisis in any great
depth: some respondents feel this is justified given the difficulty of perceiving any
direct effects, while others complained that more information would have

                                                                                  59
allowed them to understand more fully the potential implications. Government
finances have not been sufficiently affected by the crisis to make any political
impact. However, the reliance in Malawi on foreign aid flows makes it
vulnerable to the crisis, as many services are delivered either through budgetary
support or direct aid through NGOs. While wealthier countries may insist that aid
is not being cut through the crisis, the relative strength of the Kwacha being
maintained (this may only have been possible through the weakness of the
main currencies) has meant that equivalent aid flows are still less in Kwacha
terms than in 2006.




                                                                              60
8. Recommendations for Appropriate Local Policies, Programmes and Action

There was clear policy recommendation from almost all respondents: that any
effect from the crisis (and the full effects may be yet to come for Malawi) should
not jeopardise the drive for food security through agricultural subsidies. In
addition to this, there are indications that Malawi should be protected from any
dumping of goods in the market on the part of China. This concern may have
some basis if China is pursuing export strategies more focused on Africa given
the drop in effective demand in wealthier countries. Such protectionist
inclinations should be properly evaluated because anti-dumping measures are
particularly weak in Malawi and to varying degrees across the region.

Strong domestic economic policies, such as minimum pricing on key
commodities, urgently require further evaluation. Minimum pricing stems from a
social welfare measure based on costs of production, which is commendable.
However, important commodities such as cotton have been adversely affected,
and have required government distress purchases. Tobacco, such an important
crop for Malawian GDP and in particular exports, has also experienced
significant government intervention in 2009. Whether this can protect tobacco
farmers (a large proportion of the country’s population) or damage the long-
term reputation of Malawi as a source must be considered for future years.

While Malawi’s banking sector has escaped significant damage due to its insular
and domestic nature, the high level of control on monetary policy that has
shaped it should be properly evaluated. Lack of capital flows, tight credit and
extremely low foreign exchange reserves will all have an impact on economic
growth. Respondents have given examples of difficulties caused by these
financial policies, and while many Malawians do not personally require (or
currently benefit from) most financial products or forex, they will be indirectly
affected by reduced ability for Malawi to source inputs. Devaluation of the
Kwacha relative to the dollar is already underway (albeit very limited). It is
expected that once Malawian farmers have received fertilisers (dependent on
forex linked import prices), the negative effects of devaluation will be reduced
and there is more to gain from Malawi becoming more competitive for
agricultural exports. The findings of this report and feedback from respondents
suggest that this should take place as soon as possible.



                                                                               61
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