2020: Nightmare for businesses

Beginning January 2020, businesses were thriving amid the harsh political environment emanating from the disputed May 21 2019 presidential election.

But with political uncertainty gone, the greatest risk for business during the year has remained the Covid-19 pandemic, which emanated from China in December 2019, but was first confirmed in the country on April 2 2020.

As the Covid-19 cases continued to rise globally, production output for manufacturing firms who rely on imported raw materials in the country began to decline following global travel restrictions in the face of the Covid-19 pandemic.

Before the pandemic, 52 percent of firms operating on 50 to 75 percent utilisation capacity, manufacturing and production capabilities that are being utilised by an enterprise at any given time.

On the other hand, only 37.5 percent of the firms were producing at full capacity at between 76 to 100 percent.

However, by August 2020, figures from the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) showed that the number of firms producing between 50 to 75 percent capacity utilisation has declined by 8.4 percentage points to 43.6 percent.

Even those firms that were producing above 76 percent, their numbers declined by 28.4 percentage points to 9.1 percent.

This left an estimated 52.7 percent of firms operating at below 50 percent compared to the 10.5 percent of firms that were producing at below 50 percent before the pandemic.

However, MCCCI said that despite the capacity utilisation decline for manufacturing firms, the worst-hit sector remains the retail and services sector and small and medium enterprises (including those in cross border trading have been extensively hit) as they heavily rely on imports.

In the face of the pandemic, Treasury saw its monthly tax revenue falling by an average of 35 percent from K90.8 billion per month during pre-Covid-19 period to a monthly average of post-Covid-19 period.

It has since emerged that between July and October 2020, Capital Hill on average spent K159 billion a month against the average monthly revenue collection of K118 billion.

The development means that within four months, the Tonse Alliance administration spent roughly one third or 29 percent of the K2.2 trillion first substantive national budget.

MCCCI chief executive officer Chancellor Kaferapanjira said political uncertainty is gone, but the greatest risk for business remains the pandemic, which threatens sustainability of businesses.

He said: “While we are looking into the future with a lot of optimism, we are aware that increasing cases would trigger more containment measures which suppresses businesses, but we have to do the right thing by applying the measures.”

His counterpart, Chamber for Small and Medium Enterprises president James Chiutsi feared a shortage of critical raw materials and inputs for production.

“We have several members in the import and export business whose incomes are affected and the reciprocal effect is that these businesses will fail to satisfy their needs and remain in business,” he said.

Businesses drive economic stability and growth by providing valuable services, products and tax revenues and jobs.

In its short-term impacts of Covid-19 on the Malawian economy, 2020–2021, the International Food Policy Research Institute (Ifpri) estimates that government tax revenue would decline by four to 8.4 percent in the faster and slower recovery scenarios.

“This translates into $83.8 million [about K62 billion] to $178.1 million (about K133 billion) of lost revenue in comparison to the no Covid-19 case,” reads the report in part.

In the 2020/21 Financial Year, Treasury projects domestic revenues at K1.179 trillion or 16.5 percent of GDP with K1.116 trillion in tax revenue while K63.1 billion is other revenues.

Expenditure, on the other hand, is projected at K2.190 trillion or 30.6 percent of the country’s GDP and representing an increase of around 22.9 percent from the 2019/2020 preliminary expenditure outturn.

Treasury projects fiscal deficit at K754.8 billion, which will be financed by foreign borrowing amounting to K224.8 billion and K530.1 billion from domestic borrowing.

Treasury figures indicate that revenue collection figures due to the impact of Covid-19 pandemic are narrowing to K5 billion from K12 billion per month from pre-Covid-19, when cases were rising and post-Covid-19 pandemic when cases are now declining.

National Working Group on Trade Policy chairperson Frederick Changaya observed that with Malawi being a net importer, global supply chain disruptions will always be a challenge.

He said: “It is for this reason that I always say before export strategy, Malawi needs import substitution. This would ensure that we develop a good level of self-sufficiency.

“Not only would such a strategy ensure resilience against shocks in the global supply and demand markets, it would also create value linkages in Malawi. Value linkages are critical to economic growth through multiplier effect and Porters related industries concept.”

Reserve Bank of Malawi figures show that merchandise trade balance continues to worsen, closing October 2020 at minus $213.8 million (minus K162.8 billion) compared to a deficit of $182.2 million (K138.3 billion) registered in September 2020 and minus $98.0 million (minus K73.4 billion) reported in a corresponding period of 2019.

The trade deficit widened as a result of a larger increase in imports than exports.

Specifically, imports grew by $36.5 million (14.7 percent) to $285.3 million (K217.1 billion) in October 2020, surpassing the increase in exports of $4.3 million (6.6 percent) to $71.5 million (K54.3 billion) during the same period (see charts 1 and 2).

Minister of Trade Sosten Gwengwe observed that while Covid-19 has disrupted global trade with Malawi not being an exception, formulating the right policies will give an opportunity for people to trade.

He said: “Our main risks have been political uncertainty and the Covid-19 pandemic. But now with political uncertainty gone and Covid-19 cases rising, businesses are still struggling to pick-up.

“While we are looking into the future with a lot of optimism, we are aware that increasing cases would trigger more containment measures which suppresses businesses, but we have to do the right thing by applying the measures”

However, to make matters worse, the K2.2 trillion National Budget 2020/21 also failed to consider private sector tax incentives.

MCCCI director of business environment and policy advocacy Madalitso Kazembe said businesses expected the Treasury to articulate measures they

will undertake to pay outstanding arrears to private sector going forward as this has been a big challenge for years.

“The budget has, however, emphasised the need to integrate the informal sector into the system, which if it were to succeed could be one way of widening the tax base”

In its 2020/21 National Budget proposal, MCCCI hoped for efficiency-driven fiscal policies and reduced tax burden from the government.

Among others, MCCCI wanted Treasury to review excise taxes to counter smuggling, lower corporate tax from 30 percent to 20 percent to stimulate growth and invest and reduce value added tax from tand reduce value added tax.