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Eurozone crisis a threat to Malawi trade

Experts have warned that Malawi risks being bruised heavily with the on-going Eurozone crisis.

Europe is Malawi’s major trading partner and a major contributor to the country’s budget.

Of course, Europe also pumped huge sums of money into a number of projects initiated countrywide.

“Aid flows are in question as European governments struggle with high debts and public support for foreign assistance potentially wanes.

“While African governments are keen to rebrand the continent as a self-sustaining powerhouse, aid flows still buttress State finances, especially in smaller States such as Burundi, Malawi and Rwanda,” reads an article titled ‘African Economies Face Down European’ Storms published in the Financial Times a fortnight ago.

It confirms earlier fears by some trade analysts that in the face of increased global interdependence, developing countries such as Malawi are unlikely to remain immune to the debt crisis in the developed world such as Europe.

Ministry of Industry and Trade spokesperson Wiskes Nkombezi confirmed the fears in an interview last week that Malawi expects a drop in the demand for some major exports.

He was, however, quick to say the ministry is promoting diversification of exports to other markets such as Asia as a way of spreading the current risk.

Said Mkombezi: “In the past, we have been utilising few lucrative markets such as the EU [European Union], but as you might be aware we have developed the National Export Strategy which looks at how we can diversify our export markets.”

Malawi’s exports to the EU consist mainly of its principal foreign exchange earner, tobacco (77 percent), sugar (14 percent) and tea (five percent), according to the EU delegation to Malawi website.

Over the past years, Malawi has enjoyed steady growth in exports to the EU largely on account of favourable trade agreements with the European trade bloc.

As such, a possible collapse in terms of aid and trade inflows from Malawi to the EU could bruise the already fragile trade balance which has persistently incurred trade deficits as imports outstrip exports value.

 “The Eurozone crisis will affect African countries as a knock-on effect of fiscal consolidation in Europe which translates into declining demand for African exports of goods and services as well as declining remittances, FDI [foreign direct investment] and aid flows,” reads the article quoting, Isabella Massa, an economist at the Overseas Development Institute.

Apart from Malawi, other countries that have been mentioned to be most vulnerable to the Eurozone crisis are Mozambique, Kenya, Niger, Cape Verde and Cameroon.

European banks represent over half of total bank assets in these countries, according to Massa.

The European development aid, according to the Financial Times report, is already down by 1.5 percent, with Spain and Greece cutting back significantly.

 “Those ring-fencing their spending such as the UK have brought lending into line with strategic objectives. For Britain, this is reflected in a growing focus on ‘fragile States’ viewed by the government as potential hot-spots for terrorism.”

In May this year, EU announced the cancellation of its Europe Day which falls on May 9 every year to reflect on economic challenges facing the country and the EU.

EU ambassador to Malawi, Alexander Baum, also likened Malawi to EU’s economic hardships which, he said, continued to inflict pain on many citizens in both Malawi and the struggling EU States.

“Both the European Union and Malawi currently struggle with serious economic challenges, which inflict hardship on many citizens in our countries,” said Baum.

The 17-member Eurozone has seen most of its member States accumulating huge debts relative to the size of their economies and in the process rendering most their people jobless.

Meanwhile, the Eurozone’s debt ravaged economy has shrank in the second quarter of 2012, having being steady in the first quarter despite strong growth realised by Germany, Europe’s most industrialised and populous nation.

The resultant high unemployment and public spending cuts have suppressed demand including for goods and services such as those from Malawi.

That is what could hurt Malawi’s export drive and the quest for foreign currency.

 

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