Could you provide an overview of the characteristics of the main economic developments in Malawi during the last five years?
Malawi changed government in 1994, after the United Democratic Front came into power after 31 years of one-party dictatorship. The main issues that we were addressing at that time were both political and economic.
On the political side, a main challenge was the ushering in of a democratic culture, which meant that we had to set up democratic institutions. These are now well-established, such as the Parliament which brings together numerous political parties and encourages lively debates. There is also the electoral commission, which has conducted two general elections and many by-elections, the human rights commission, the ombudsman, the anti-protection bureau, and of course an independent judiciary. What remains for the political culture is civic education. Democracy is a new concept in Malawi, so the tenants for many issues have to be explained and taught to the people. After 31 years in an autocratic system, habits die hard, and therefore we have to go through a civic education program. This started in 1994 but it is a long process. It will still take some time for all the tenants and traditions of democracy to be entrenched into our cultural system to produce a genuine type of democracy which is Malawian.
On the economic side, we inherited a very volatile economic system in 1994 – inflation was very high, foreign exchange reserves were very low and the government deficit was very big and unsustainable. Our very first job at that time was to stabilize the economy, which we managed to do in the first two years. Inflation went down, foreign reserves increased and the government deficit was brought down. However, in the third year we started experiencing inflational pressures because of the drought situation which occurred at that time. The foreign exchange earnings from tobacco came down in two years and we had a large exchange gap of USD 80 million. This put pressure, as you can imagine, on the Malawi Kwatcha, and the result was a heavy depreciation in 1998, by over 60 %, which brought about inflationary pressures. The other characteristics on the economic side was to liberalize this economy and to encourage and promote private sector participation. The previous government had maintained a controlled economic system, and there were many restrictions. In agriculture, for instance, the most lucrative crops like tobacco were reserved for large estate owners, and small landowners were not allowed to grow these crops. So we liberalized the system, repealed laws and allowed everyone to grow tobacco and other crops. We liberalized the supply of fertilizers as well, so that it would not be only the parastatal company which could import and distribute fertilizers. Now, even in the small townships there are individuals who are selling fertilizer as a small business. We also removed price controls, which are not condusive for private sector participation.
Generally, we moved ahead to liberalize the economy and started the privatization program where about one hundred parastatal organizations were slated for privatization. Another area we tackled was in the area of public sector reform – the civil service and other associated services had to be reformed for various reasons: to be in line with a democratic structure and to increase efficiency. So we launched a public sector reform program and a police reform program. Police reform was especially important because in the past it was used for political reasons, so we had to change the police so that it would become a professional police force which is not controlled by any political party.
We also have two important programs: one is free primary education, which we launched in 1994. We consider this to be a very important program, because illiteracy rates were very high, possibly the highest in Africa, if not in the world. Primary school attendees comprised only 54% of all eligible children, and we removed school fees which represented an important barrier. In fact, when fees were cut, primary school enrolment jumped by almost 50%. Moreover, the advantage of universal primary education is that you address the gender gap. Culturally, if a family had a boy and a girl, but only had enough fees for one child, they would send the boy to school. So by removing financial requirements we addressed the issue of gender imbalance, and now in Malawi schools there are more girls than boys, which also reflects the general population since there are more women than men in Malawi.
Secondly, because of previous government policies on agriculture, there were problems with food security. We started addressing the issue with the Starter Pack Program, which is a small pack of inputs with legume seed and maize seed that is given directly to farmers, allowing them to grow food for their family for one year. Two consecutive years after having started this program, we have increased the food supply and changed Malawi from an importer of food to an agricultural exporter.
What has been the economic impact of the free market system since 1994?
Although the previous government system was a control based economy, there were not many parastatals compared to our neighbors. Even at that time there were less than 20 parastatals, so it was an interesting system in which the government did not actually have public businesses as such— they simply controlled private companies. So our job was mostly to liberalize and let the private companies do their job according to market forces.
With liberalization and privatization, of course there are certain problems which arise. The most important issue is the inflationary impact on the economy due to liberalization. Inflation is the biggest enemy of the poor, and our policy is poverty reduction. Another problem is that with liberalization the local manufacturing industries now have to directly compete with cheaper imports, especially from Zimbabwe and South Africa. Our industries have had problems competing, and some of them have had to close. We have taken measures to correct these problems, but we believe that the private sector has to be more efficient and compete on the international market. We cannot protect companies simply for sake of protecting them because then we will be encouraging inefficiency, so the best way is to help them lower their production cost and compete. One other problem was the transport costs for Malawi, which is why we designated the Nakala corridor as a priority to encourage mobility and be more competitive internationally.
As for poverty, we have spent our efforts to lower inflation, reduce the government deficit and to design a safety net program for the poor with services like the starter pack, for example.
Yet will programs like the starter pack take away from private sector initiatives?
No, it will actually be a good business for the private sector. During the first two years, when the program was just beginning, we had to do everything ourselves and distribute the packs. This year, however, we are not doing this. We are distributing vouchers, and then the recipients will choose where to get their fertilizers and the private sector will be invited to produce the packs, which is a way to encourage private sector participation.
What effect do regional problems have on the country – are they positive or negative?
I would say that there are both positive and negative effects. We are members of the South African Development Community (SADC), trying to coordinate and integrate ourselves into the southern part of Africa. Small countries like Malawi look at regional integration as a positive development.
For example, coordinated cross border crime prevention is one thing which we have benefited from by joining SADC – we now have an integrated system of police and if someone steals a vehicle in South Africa, for instance, if it crosses our border we can capture it and take it back, and vice-versa.
However, there are also negative aspects. Because we import most of our goods from Zimbabwe and South Africa, anything which happens to these two countries will affect us. The price of gold in South Africa will affect us, and the political turmoil in Zimbabwe and currency depreciation there will also affect us. In the tobacco area, we are competitors with Zimbabwe, and if a buyer is in the region the currency relationship will decide where he will buy tobacco, so we have to keep an attentive eye on the dollar. Although Malawi’s reserve position is very strong, we hope to further strengthen and perfect it.
What have been the effects of monetary policy and inflation control?
Regarding policies in the financial area, our main goal is poverty reduction, and there are certain fundamentals which we have to follow to achieve this. First of all, we always should have prudent macro-economic management, control inflation, increase reserves as much as possible and maintain a stable currency. Malawi inflation is created by the liquidity in the system brought about by the government deficit, so the main thrust must be to control the budget deficit. We have done much work in this area, bringing the deficit down from 20% of GDP to just under 5%, and we intend to lower it even further. | Yet we are in a difficult situation – on one side we want to give money to the social sector, but we also wish to control it, so there has to be a balanced approach. To address this issue we developed a program called the Crash Budget System, where ministries are given amounts of money which have been realized from our revenue collections of the previous month, and they can only spend up to that amount. This way we can control the amount of money being pumped into the economy. But the downside is that certain programs cannot be implemented if certain rates are not as high as predicted, and now we are adjusting the system from a monthly to a quarterly program in order to be in a position to catch up with fluctuations. So the monetary control of budget expenditures is the main instrument that we are using.
Are you satisfied with the results of this policy?
Yes, financially we have been fairly successful in controlling expenditures and we hope that in the next financial year we will be in a position to relax, particularly in the social sector.
On the monetary side, there is the Bank of Malawi which has a very tight monetary policy. The reserve requirements are actually quite high, at 35%, perhaps too high when we compare with the region which is at 10 to 15%, so we are now decreasing reserve requirements and increasing liquidity in banks to support the private sector. Tight monetary policy together with tight fiscal policies have helped bring down inflation over the past twelve months. We feel that this prudent macro-economic approach will continue in the next few years. Of course, what we need most is to generate more revenue, not simply controlling but also obtaining more money for government revenue. We have developed a tax reform program aimed at auditing the tax base and lowering rates at the same time. We hope that in the next budget we will implement new measures to achieve this objective.
Where are the most important areas to expand the tax base?
I think that tax rates are too high. When this happens, people try to find creative ways of dodging tax payments. However, when tax rates are very low it is not worth their efforts, so we believe that by lowering taxes people will not make the effort to escape tax payments. Secondly, there is a black market in Malawi which does not contribute to the tax base, and we are working to integrate it. We are developing the surtax system in Malawi, which is a substitute of the VAT. Through this system we will be able to obtain a greater number of tax contributors, at a lower rate.
Within the development of the trade balance in the country, what are the strongest foreign exchange earnings?
This is where the problems of the Malawi economy come from – 70% of our foreign exchange earnings are from tobacco, which is too high for only one crop. When tobacco was at its peak, we knew that every year revenues would come in, but presently tobacco is going through difficulties world-wide. The cost of producing it is high, the cost of law suits in western Europe and the Americas is being passed on to the growers, and the anti-smoking law is taking roots in the west. To illustrate the situation, yesterday I had to appeal to tobacco buyers for them to give a bit more to our farmers, because the repercussions are disastrous to our economy as a result of our reliance on this one crop for foreign exchange. We have small resources from manufacturing, but compared to tobacco it is very low, perhaps 10 to 30 %.
The biggest challenge now is to diversify our sources of foreign exchange. We think that tobacco will continue to be important, but we would like to reduce the proportion of tobacco to our foreign exchange earnings, and we are looking at other crops such as spice, flour and other tree nut crops. However, agriculture practices change at a slow pace and you cannot force farmers to change crops, but we are encouraging them by providing incentives. We are also supporting manufacturing, which has an added value for exports. This is an area which I am particularly interested in, especially for small and medium sized businesses.
Would you say that if the economy diversifies, there will be a strong base for the creation of niche markets?
I believe that Malawi has an advantage. We have a good labor force and people who can learn very easily and quickly. Malawians are friendly, and we also have areas which can be developed for special markets. Tourism is an area in which diversification will attract much needed foreign capital, and I think that with a government which is pro-business, managing an economy prudently and ensuring an independent judicial system, I this could be an attractive environment for foreign investment.
As far as the international community is concerned, what incentives and initiatives have you undertaken in order to create more exports and attract more foreign investment?
In the SADC area the type of investment incentives that are available are mostly the same. In terms of tax holidays, tax dividends and so on, there are incentive measures but these are not particular to Malawi. I prefer to emphasize what is particular to Malawi, which is the quality of the people in this country. If you go to most other African countries, you will find that the preferred worker is a Malawian. In terms of the type of person, his sense of responsibility, dedication and loyalty to the company, Malawi has a very unique quality to offer. Moreover, the democratic institutions and system in Malawi is excellent, perhaps the most democratic country in southern Africa. An investor should take this in account when deciding where to invest.
Infrastructure is another issue where we are taking action and adopting necessary policies. For the road network, for example, we have formed the National Road Authority (NRA), which is led by the private sector. Although the NRA is a parastatal, members are from the private sector. Revenues are generated automatically from the sale of petrol, so every time you buy petrol a certain percentage goes directly to the NRA. Moreover, donors like the EU have contributed to the national road authority, adding to the depth of its operations. It has been ten months for the NRA, and they have maintained most of the main roads and over 60% of the rural roads. We believe that the road network will be quite good in a year or two.
In the area of telecommunications, we have liberalized the sector. Previously we only had one mobile phone provider, but now another private mobile operator has come in, and there is room for anyone who might want to come into the market. Now we are looking at the landlines – and here there are two approaches: Telephone Malawi is looking for a strategic partner and we are also opening up for competition. So we think that in the next year or 18 months, the telecom system in this country will be revitalized. Its development will be another added value for investors, who will have access to services like high speed internet and reliable e-mail providers.
In rail and lake transport, we are privatizing Malawi Railways. Luckily for us, the Mozambique government also privatized and the same operator won the bid for Malawi as well, so we plan to have a similar, interconnected system. They are investing a great deal of funds into the system, about US$6 million, so it will take about a year or so until we see the benefits, but we expect prices to decrease eventually. Malawi Lake Services is also being privatized, with a concept of connecting the lake transport with river transport, in order to coordinate transport directly through the lake and river out to the Indian Ocean.
What is the status of the drive for privatization?
The number of parastatals that are slated to be privatized has been set at a total of about 100. Some of them are substantial companies, while others are smaller, like individual farms. This year we are preparing for the sale of 17 parastatals, and in the next few years progress might be a little slower because the companies which will be left over will be utility companies such as the telephone company, the water board, the electricity company and the national airline. We have requested assistance from officials of the World Bank who could advise the government on the privatization of these larger utility companies.
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