Malawi: Working To Attract Investment

Courtesy of Ventures Africa, a report on Malawi:

Did President Joyce Banda recently win the Nobel Peace Prize? It may appear as such with her current world tour. Banda is president of the fairly under-the-radar Malawi. She is the East African country’s first female president and only the second in Africa after Liberia’s Ellen Johnson Sirleaf. She is the daughter of a musician and sister to Anjmile Oponyo, the former CEO of Raising Malawi Academy for Girls founded by Madonna and Michael Berg. She is a rising star in Africa. But she is not on an award tour.

Mrs. Banda rather is asking investors to consider the struggling Malawi as an investment destination. She caused uproar at home and moderate celebration abroad when she oversaw the Reserve Bank of Malawi’s devaluation of the kwacha from K168 to K250 against the American dollar (49 percent devaluation). The reasons for her decision are quite evident. Mrs. Banda wanted to make an immediate cut into the trade deficit. She bet on lower costs boosting exports, particularly those exports of tobacco and sugar cane. She also gambled that investors would be excited and their immediate interest and money could create jobs. International donors conspicuously endorsed the plan. Or the donors, who accounted for 20 percent of GDP and 40 percent of the government budget, were simply excited to see her efforts to work with them, a stark contrast to former President Bingu wa Mutharika’s approach to donors before his death.

The results have been mixed. Imports have become more expensive. This is generally intended in part to boost demand for cheaper domestic products. Malawi however is a net importer of necessary products such as fertilizers and petroleum products. Mrs. Banda has tried to garner aid and support for food and energy to in effect create safety nets to offset the resulting inflation of goods, specifically those that used the now more expensive imported raw materials or were dependent on cheap fuel for transportation throughout the country. Her requests have been heard. But it is unclear when the donor money and its needed impact will come.

Detractors to the devaluation suggest that the current inflation is being exacerbated by traders who are hiking the prices of staple goods such as cooking oil and sugar. There may be some truth to this thinking. The prices of goods jumped by the end of business day when the devaluation was announced, says a Reserve Bank insider, before the impact of the actual devaluation could take effect. Yet the amount of truth in this statement cannot overshadow the greater challenges in Malawi.

Malawi requires greater private investment to overcome the inefficiencies that hamper its economy. The country’s privatization plan, authorized in 1997 under the Divestiture Sequence Plan (DSP), added money to the government’s coffers and continues to do so. Ethiopian Airlines recent announcement to partner with the flaccid Air Malawi, now restructured as Air Malawi 2012, is a sign that investors still see great potential. The government sent all 243 Air Malawi employees on indefinite leave with the expectation that they will be paid off in the future, according to Privatisation Commission CEO Jimmy Lipunga. Ethiopia Airlines is betting that Malawi will grow as a tourist destination in the near term and develop into an investor destination over time.

The country has spent much of the cash from the privatization program, specifically under the auspice of the former President Bingu wa Mutharika’s regime, in good and bad ways. Healthcare and education have strongly improved since 2005. More than ten percent are still believed to have HIV/AIDS, which, while high, still represents a significant drop from around 14 percent in 2005. Primary education is free but not compulsory. The government has aspirations to make secondary education free but resources do not currently allow for it. These good results nevertheless were eclipsed by presidential mishaps. Mrs. Banda, upon taking office, chose to sell off the presidential jet, secretly purchased by Mr. Mutharika, as well as the presidential fleet of 60 Mercedes limousines to remove the lavish image associated with the presidential office.

Daring private investors will not find too much privatization opportunities left these days. But it should not scare investors as a lot is needed in the country. The country greatly needs an upgrade in telecommunications. Nearly all telecom providers in Malawi sell internet devices, known as dongles, which use mobile phone or telephone connections to provide internet services. These devices leave the most accustomed African traveler disappointed and frustrated. Despite poor service, about 32 percent of Malawians have mobile phones – something hard to understand amongst stories of acute poverty but evident in the streets of Lilongwe and Blantyre. Smart phone capabilities are lacking and will have to improve to support business investors.

Agricultural investment could change the lives of most Malawians. The government’s fertilizer subsidies program has made the country a net food exporter. But greater efforts must be made to commercialize local crops and create greater returns. Mrs. Banda’s pledge of governmental loans is start down the right track. Yet she must hope that donors and private investors partner to further such efforts. Sugar and macadamia nut processing has potential if transport costs can be addressed. Simple cultivation (i.e., lack of processing) and export leaves most of the value to be capture offshore. Some investors believe that the country could start exporting groundnuts again – something not seen since late 1970s because of the high levels of aflatoxin in the nuts. Such chatter on the ground probably speaks to more optimism than potential. Optimism, says an interested investor is really all it is right now. Realization of potential, he continues, may never come for most sectors.

Mining could improve government accounts. Uranium and coal production increases will provide needed cash. But the greatest potential in value terms could be oil and gas. Licenses for oil and gas exploration however were only recently awarded, leaving some time before anything could possibly be discovered.

Growth in the tourism sector would provide additional foreign exchange and economic and social support to local communities, particularly those in rural areas. Mrs. Banda insists that tourism is a priority sector for development. Though rarely discussed, Malawi offers exquisite natural beauty off the coast of Lake Malawi, Africa’s third largets lake, and an amazing wildlife. Yet turning the beauty into returns requires investment in infrastructure and more attention be paid to preservation.

Not yet sold, investors are Mrs. Banda’s best hope. Strikes and protests consumed the early months of 2013. In February, the government had to concede to pay hikes for civil servants, ranging from 10 percent for the highest paid to 60 percent for the lowest paid. Many employees had stopped working, leading to closures of schools and other public services. On the street, it is not hard to see the effects of devaluation. People barely can afford basic goods. On the streets, you see locals sometimes munching on millet, product used as bird feed in the United States.

Privatization may have been a signaling to investors that the country was ready for change. Then Mr. Mutharika undermined efforts. Mrs. Banda hopefully revived such efforts through further privatization and mandated currency devaluation. All these efforts are just instruments in changing perception and direction. But much still must be done to attract investors. Investors need different stories and images from the ground before they come running to invest. At the moment, there are not many investors willing to hop the flight to Malawi with me.

This entry was posted on Tuesday, July 16th, 2013 at 11:55 pm and is filed under Uncategorized.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

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