Malawi is struggling to attract Foreign Direct Investment (FDI) because of its small market and challenging business climate which deters potential investors, the World Bank has said.
In its latest Country Private Sector Diagnostic Report, the Bretton Woods institution rates poorly Malawi’s ability to attract FDI, saying the country has one of the lowest investment rates in the region in part due to exogenous factors.
The global multilateral lender says Malawi’s landlocked status, small population and minimal purchasing power make attracting foreign investment a challenge.
World Bank figures show that investment rate in Malawi averaged 15.3 percent of gross domestic product (GDP) between 2000 and 2019, which is way below neighbouring Zambia at 35.4 percent and Tanzania at 32 percent.
Reads the report in part: “FDI net inflows as a percent of GDP have been volatile in recent years, in part because of the country’s relatively small economy and its success in attracting the occasional large investment.
“Overall, however, Malawi’s inward stock of FDI remains low compared with its peers and inflows have decreased since a peak in 2014.”
Meanwhile, economic experts have agreed with the analysis by the World Bank, urging Capital Hill to fasten the creation of a conducive environment for private sector to thrive.
In an interview on Tuesday, University of Malawi economics lecturer Levison Chiwaula said that high levels of poverty mean that the aggregate demand in Malawi is low.
He said: “We have people who cannot effectively buy but need to be provided for. This narrow market is bad for private sector as well as government.
“The government has to provide for a large proportion of the population and a small proportion of the population that can support private sector through their demand. If the country improves the investment climate and supports private sector to exploit international markets, this will overcome the narrow market problems.”
Catholic University of Malawi economics lecturer Hopkins Kawaye said the country is losing out on the benefits of increased FDI inflow, citing job creation, provision of tax revenue to government and increased exports.
He said: “The country needs to make sure that the business climate is not challenging by ensuring that energy [electricity] is readily available as it is a catalyst for production, interest rates are low and that corruption is reduced as it increases transaction costs.”
While the entire African region has thus far weathered the global decline in FDI, the World Bank report, however, observes that Malawi needs new and replacement capital goods to continue to boost productivity across sectors.
The bank also notes that an uptick in FDI announcements prior to the Covid-19 crisis was a promising sign of confidence in Malawi’s investment climate, “but concluding these and new deals in the wake of Covid-19 will be difficult”.
Prior to Covid-19, a small number of large deals seemed to suggest Malawi was becoming a more attractive location to invest.
Quoting the Financial Times FDI Markets database, World Bank says in the few years prior to Covid-19, a small number of relatively large deals suggested that Malawi was becoming a more attractive location to invest.
Last week, a report by audit and business advisory firm EY also revealed that Malawi remains among countries in Africa attracting insignificant FDI, thereby missing out on the top 15 African countries wooing investors.
According to the report, the bulk of investments in southern Africa were concentrated in South Africa owing to its diversified economy, followed by neighbouring Tanzania, Zambia and Mozambique.
Responding to the EY report last week, Malawi Investment and Trade Centre (Mitc) investment promotion manager Modie Chanza said the agency continues to woo investments into the country.
She said: “Mitc operates a one-stop-service centre and provides after-care services to investors that want to establish or are operating their businesses in Malawi.
“Mitc is working with the Ministry of Lands in securing land parcels that can be availed to investors.”