I. Commercial Overview Synopsis of Commercial Environment A landlocked country of 46,000 square miles, Malawi, located in southeastern Africa, ranks among the world's least developed countries. In 1993, Malawi's per capita GDP was USD 207. In 1994, its population has increased to 9.7 million. Eighty-five percent of the country's work force is engaged in agriculture, which accounts for 34 percent of GDP and 90 percent of export earnings. In 1993, tobacco accounted for 68 percent of Malawi's exported commodities, tea for 11 percent, and sugar for 5 percent. Since February of 1994, the Government of Malawi (GOM) has allowed the national currency - the Malawi Kwacha (mk) - to be freely traded. As of June of 1994, the Kwacha has effectively depreciated by approximately 65 percent against major foreign currencies. Industrial spare parts, intermediate goods, and consumer goods, the majority of which are wholly or partially based on imported components, have all increased in price. The GOM estimates 1994 annual inflation at close to 30 percent. Malawi's manufacturers have traditionally been processors of agricultural commodities or import substitution oriented. However, since the new foreign exchange regime allows local companies and individuals to establish and control foreign currency accounts within the country, Malawi's industries are beginning to identify and implement export-enhancing strategies. The high cost of transport remains a serious constraint to Malawi's economic development. Before 1981, over 90 percent of Malawi's imports and exports moved by rail through the Mozambican ports of Beira and Nacala. Both routes were closed during that country's extended civil war, during which time over 40 percent of Malawi's total import bill was attributable to transport costs. With the cessation of Mozambican hostilities, the rail link to Nacala has been partially rehabilitated and Malawian truckers can now use a road route to Beira. Nonetheless, high transport costs continue to act as an effective barrier to trade. Malawi is dependent on international donors for balance of payments support and development assistance. Malawi's recent political evolution has facilitated positive GOM-donor relations. This is fortuitous since poor 1993/94 rains have reduced Malawi's annual maize (corn) harvest below levels consumed by the the country's population. Simultaneously, the country's aggregate foreign exchange earnings are expected to decrease since its tobacco crop is well below historic levels. Overview of Import Market Agricultural Sector - Malawi is primarily an agricultural producer. To support that sector, it imports fertilizer, pesticides, processing equipment and technology. As the country looks to diversify its agricultural base, imports relating to horticultural production and other alternative crops are expected. Industrial Sector - The country's industrial producers have begun to seek new export opportunities. A slightly increased demand for foreign manufactured spare parts and technology is expected as Malawi utilizes its industrial capacity more fully. Consumer Items - Malawians' demand for foreign produced consumer goods is high, but historically, their supply of foreign exchange to purchase such goods has been low. The effective devaluation of the MK and increasing national inflation should further reduce consumer ability to purchase imported products. Local and Third Country Competition South Africa is Malawi's primary supplier of goods. The UK is the second most significant importer into Malawi, followed by Japan, Germany, and Zimbabwe. Locally, Press Corporation, a Malawian corporation which accounts for at least one quarter of the country's GDP, Lonrho, a British firm, and the Malawi Development Corporation (MDC), through its subsidiary companies, are the most significant producers of goods. Host Country Business Attitude Towards the U.S. The GOM and local businesses hold primarily positive attitudes about the quality of U.S. products and services. However, potential U.S. exporters to Malawi must overcome existing commercial relationships with the United Kingdom and South Africa, as well as widely held perceptions that U.S. goods are not cost competitive and that U.S. producers are not particularly interested in the Malawian market. Major Business Opportunities The long term international outlook for tobacco as a cash crop is poor. Although Malawi's burley tobacco has some sound competitive advantages such as low pesticide residues and high expansion characteristics, Malawi's tobacco growers are seeking alternative crops. Expertise and equipment facilitating agricultural diversification will be required. The new GOM has repeatedly noted that Malawi has assets which could be used to increase its attractiveness to international tourists. Developments in that sector, including the formulation of a national strategy to increase tourism, are expected. Malawi is seeking to upgrade its telecommunications capability. Assuming that the GOM can generate financing for its projects, expertise and equipment in this area will be required. Major Roadblocks to Doing Business In recent years Malawi's reserves of foreign exchange have been insufficient to support the country's demand for imported products. As a result, international suppliers have periodically found collection of amounts due to be difficult, and Malawi's firms presently have access to only limited amounts of international credit. Given the advent of Malawi's new foreign exchange regime, this situation may change for the better. Alternatively, some local businesses have successfully turned to barter transactions. Malawi's is a small market. Transport costs, distance from the U.S., and established commercial relationships with South Africa and the UK can inhibit potential U.S.-Malawian business relations.