The foreign currency deficit the Malawi economy has faced for the past two years or so, has resulted in, among others, fuel pumps running dry now and then, companies scaling down on production and, in worst case scenarios, shedding its staff due to lack of raw materials for production and medical drugs running short in public hospitals. To date, there seem to be no solution in sight with tobacco revenue, accounting for about 60 percent of forex earnings, plummeting 30 percent this year and donors freezing 21 percent of their budgetary support in the 2011/12 financial year. Our business journalist CHIKONDI CHIYEMBEKEZA takes an in-depth look at the situation and looks forward to 2012.
Malawi’s businesses, bruised by a foreign currency squeeze, now seem to understand that unless there is a quick injection of foreign money into the economy, the many hiccups the economy is experiencing as a result of its shortage will not go away any time soon.
For the past two years or so, the country’s foreign currency bowl has been low; if not literally dry at times. Never has the situation been as critical as 2011 when long-winding queues for fuel were the order of the day.
Public hospitals have failed to supply drugs, telling suffering patients to buy them in private pharmacies. Companies, too, have had to scale down production and, worst still, fire some employees because of critical shortage of raw materials which they are failing to import because of forex scarcity. Machines are not operating at their full capacity.
Much to the public’s annoyance, government has, on a number of occasions, blamed the forex shortage on high rates of economic growth, averaging 7.5 percent of gross domestic product (GDP) since 2005.
“Part of this economic growth has translated into high demand for imports. Unfortunately, our export base has remained narrow in that we continue to rely on the same traditional exports of tobacco, tea, sugar and recently cotton. In aggregate, the export value has not kept pace with import demand,” former finance minister Ken Kandodo in his 2011/12 national budget statement.
Evidently, figures from the National Statistical Office (NSO) show that Malawi’s exports represent 20 percent of the country’s GDP whereas imports are the equivalent of 39 percent of GDP.
This scenario results in a trade deficit of 19 percent of GDP; hence, dwindling international foreign exchange reserves and the foreign exchange shortages. It also presents a big challenge in the procurement of strategic imports such as fuel, fertiliser and medical drugs.
At the same time, the country’s commercial banks have been taking long to settle foreign invoices, making some importers unable to secure credit lines or establish letters of credit.
Malawi’s main reliable sources of foreign currency are tobacco sales and donors who pump their money through the budget. This year, however, tobacco has only raked in $293 million, according to final figures from Auction Holdings Limited (AHL). This represents a 30 percent reduction over last year’s $416 million.
Donors under the Common Approach to Budget Support (Cabs) are yet to disburse their budget contribution of K65 billion (over $380 million), representing 21 percent of the 2011/12 national budget, due to economic and governance concerns. This is the money authorities have the power on how they can use it because they are not earmarked for specific projects or programmes.
What efforts did government employ in the year to tame the forex problem? Practically, as an ad hoc measure, Minister of Natural Resources, Energy and Environment Goodall Gondwe revealed recently that government has been borrowing heavily from international financial institutions and foreign governments.
“As I have been saying, the problem of fuel shortage is as a result of lack of foreign exchange that is why government is borrowing money as the best way to deal with the problem,” he explained.
Gondwe stressed that government is in talks with undisclosed nations to be supplying fuel in the country in exchange for tobacco.
He believes the only reliable short-term measure to deal with fuel shortage was to borrow money to sustain economic and social activities.
Government also instituted other five measures that will help to improve foreign exchange availability on the market.
“In order to deal with the problem of foreign exchange shortages, government will enhance and introduce supply side measures that will unlock the export potential of Malawi and increase the supply of foreign exchange on the market,” read the 2011/12 budget statement.
Firstly, the budget made an allocation of K1.6 billion for the promotion of cotton production in Malawi. Probably authorities were lured by better than expected prices of the crop in the 2010/11 season.
Cotton lint fetched prices as high as $5 (K840) per kg in export prices whereas local prices for seed cotton, the product sold by farmers, surged from as low as K30 per kg last season to about K120 per kilogramme this season, significantly improving incomes of many farmers who grew cotton in the previous season.
The allocation, therefore, was to build on what was achieved at national and household level, to support farmers to produce high-quality cotton lint for the domestic and export markets. Government procured cotton fertilisers and seeds which have been distributed to smallholder cotton farmers on loan to be repaid at the time of selling their seed cotton to ginners next year.
The authorities’ conservative estimates indicate that the money will assist smallholder cotton farmers to cultivate over 200 000 hectares of cotton fields in the hope of generating $300 million (K50.4 billion) of foreign exchange in the next 12 months.
If well taken care of, cotton is a viable crop with its business linkages that range from ginning, spinning, weaving and textiles manufacturing plants.
Potentially, the cotton industry has huge potential to create employment, produce a variety of products which will contribute to industrial production and to generate foreign exchange for the country.
Secondly, authorities established an export pre-finance and guarantee scheme to promote the export sector. This measure, according to authorities, will help to provide working capital and medium to long-term loans to exporters.
It focuses on small-scale and non-traditional exporters who may wish to venture into processing and export of non-traditional commodities such as gemstones and non-traditional agricultural products such as pigeon peas, wheat, soya and paprika.
Thirdly, government enhanced export tracking after establishing that Malawi is not fully benefiting from the goods that it exports because of what is called transfer pricing through over- valuation.
As a stopgap measure, to be spearheaded by the Reserve Bank of Malawi (RBM), government thought of introducing reference pricing which will be used to value exports and validate declarations made on CD1 form as exports are discharged through borders.
Under this measure, government is also working towards signing double taxation agreements with countries of final destination for Malawi’s major exports.
Through these double taxation agreements, public tax collector Malawi Revenue Authority (MRA) will be obtaining price and volume information on Malawi’s exports to those countries and will use that information to determine cases of transfer pricing.
Fourthly, government wants to exploit the untapped source of foreign exchange by Malawians in the diaspora. Under this, remittances are being encouraged. This is on the understanding that although these Malawians are allowed to operate Foreign Currency Denominated Accounts (FCDAs) with banks of their choice, they have consistently sent their money through informal channels.
Authorities promised to come up with concrete incentives to encourage Malawians living outside to use formal channels to remit funds to their families or for investment.
The last measure was the waiver of 60/40 retention or conversion rule for interested businesses to meet unforeseen foreign obligations. In the past, the RBM granted such waivers on a case-by-case basis.
Malawi Confederation of Chambers of Commerce and Industry (MCCCI) chief executive officer Chancellor Kaferapanjira welcomed the waiver, observing that it rewards local exporters.
Since these forex- generating measures were introduced mid this year, it remains to be seen whether going forward in 2012, they will bear fruits.What is evident, however, is that Malawi is in a serious need of foreign currency. Malawians would have wanted a quick fix to the forex puzzle as soon as yesterday. But like everything else Malawian in recent years, nothing is ever in black and white.
