III. Economic Trends and Outlook Major Trends and Outlook The Government of Malawi (GOM) expects real Gross Domestic Product (GDP) to decline by 6.2 percent in 1994. The projected decline is based on estimates that Malawi's agricultural production will decline by approximately 30 percent. The latter is due to the cumulative effect of poor 1993/94 rains and reduced smallholder access to agricultural inputs - fertilizer, hybrid seeds - due to low loan repayment rates in 1993. Estimates of 1994 gross smallholder crop output - which include crops such as burley tobacco, sugar, and beans - place smallholder output at 2.7 million tons, or approximately 43.5 percent below 1993 levels. Maize (corn), which provides more than 70 percent of Malawians' caloric requirements, is the country's staple. Malawi needs the equivalent of 1.6 million metric tons to feed its population. For the 1993/94 growing season, the national maize crop is estimated at 950,000 metric tons; an amount well below the required minimum. Malawi will attempt to cover the shortfall through commercial imports, strategic grain reserve withdrawals, and international donations. The volume of Malawi's 1994 tobacco crop is also expected to decline. Some experts estimate that Malawi's 1994 burley tobacco crop may be no greater than 65,000 metric tons. This compares to the 1993 yield of 103,200 metric tons, which was itself considered a disappointing harvest. To date, sales prices for high quality tobacco have been good, but prices for lower qualities have been very poor. Malawi's conversion of its tobacco auction sales from MK pricing and payment to US dollar pricing and payment, has not created undue problems within the tobacco sales system. Malawi's tea and sugar sectors are expected to show stronger performances than in 1993. The GOM estimates that Malawi will produce 42,000 metric tons of tea and 218,000 metric tons of sugar. This would amount to a 6.3 percent increase in tea production, and a 69.3 percent increase in sugar production. The dramatic comparative rise in sugar production reflects Malawi's particularly poor 1993 season, where the country's main sugar factory was disabled for significant periods due to extended renovations. A better comparison is the 1992 season, where sugar production was approximately 200,000 metric tons. In February of 1994, the GOM initiated a floating foreign exchange regime for the Malawi Kwacha (MK). The GOM also simultaneously introduced regulations which allowed local companies and individuals to hold foreign currency accounts within Malawi. The effects of the liberalized foreign exchange rate regime have not been uniform. On the one hand, the MK has depreciated by approximately 65 percent. This loss in value has contributed to inflation and demands for higher wages. The GOM predicts that inflation will increase to 30 percent in 1994, up from the 1993 rate of 22.8 percent. On the other hand, Malawi's manufacturing sector has been stimulated to increase its domestic production as well as to increase its export volumes. The GOM predicts that gross 1994 industrial production will increase as compared to 1993. Balance of Payment Situation Note: The GOM's fiscal year runs from April 1 to March 31. Nonetheless, the Reserve Bank of Malawi (RBM) compiles figures on a calendar year basis. The discussion below follows the Reserve Bank convention. End Note. In 1993, Malawi's balance of payments deficit amounted to USD 97.7 million. In 1994, the GOM projects a lower deficit of USD 26.20 million. The 1994 figure reflects the resumption of international donor assistance and an assumption that government revenues will increase. The latter assumption is optimistic. In 1994, Malawi's current account is expected to come under continued pressure despite a small surplus in the merchandise trade balance. The RBM estimates that rising freight and insurance costs, in line with increasing imports, will amount to MK 1,265.3 million (USD 181 million), and will be the main source of current account pressure. The current account deficit is projected to widen to MK 1,503.6 million (USD 215 million) from 1993's MK 652.8 million (USD 93.3 million). The RBM expects 1994 exports of goods (calculated fob) to reach MK 1,953.2 million (USD 279 million), an increase of MK 555.6 million (USD 79.4 million) from 1993. 1994 imports of goods (calculated fob) are also expected to increase to MK 1,897.9 million (USD 271 million), an increase of MK 702.6 million (USD 100.3 million) from 1993. With the expectation of the full resumption of non-humanitarian donor assistance, the RBM predicts that the 1994 capital account will "perform satisfactorily." The RBM expects the balance on long-term capital to improve to MK 1,226.3 million (USD 165 million). In 1993, the balance reached MK 823.8 million (USD 118 million). Government Role in the Economy The present GOM came to power in May of 1994 and has not yet delineated its economic priorities through specific actions. However, the GOM has declared poverty alleviation through economic growth as its principal goal, and has delegated to itself a facilitating role in support of private industry. In a recent public speech, the Vice President declared that proposed GOM remedies included job creation through GOM-facilitated economic growth, the removal of fiscal disincentives, increased accessibility to capital for local entrepreneurs, the utilization of Malawian expertise, and subcontractual relationships between large businesses and small businesses so as to facilitate growth in the latter. Similarly, the Finance Minister and the Minister of Commerce, Industry, and Tourism, have publicly emphasized the GOM's intention to develop a more open economy in which the private sector plays the predominant role, to shift the role of the GOm from a promulgator of regulations to a promoter of commercial activities, and to foster closer cooperation between government and the business community. Principle Growth Sectors Against the backdrop of a sluggish economy, the following areas are most likely to grow in 1994: -- Agricultural diversification; -- Manufacturing, specifically the production of goods which are simultaneously import substitutes for Malawians and competitive regional exports; and -- Financial/banking consultants who can advise local financial institutions how best to prosper under the liberalized foreign exchange regime. Trade and Investment Barriers Investment - Malawi actively solicits foreign investment. To this end, it has legislated tax allowances for new buildings, new machinery, investments in designated geographic areas, purchases and importation of used equipment, training costs, and industrial operating expenses within 18 months of start-up. It has also legislated indefinite loss carry-forwards for tax purposes, and duty free importation of heavy commercial vehicles. Malawi supports manufacturing in bond, and expects to have export processing zone legislation in place by the end of 1994. Nonetheless, past corporate difficulties in securing foreign exchange for dividend remittances have acted as a disincentive for further investments in Malawi. Additional disincentives are Malawi's generally poorly educated work force and its high 1994 inflation rates Trade - Malawi imposes an import duty of up to 40 percent on most goods entering the country. Luxury items, which include a spectrum of goods from ready-to-eat breakfast cereals to new automobiles, are taxed at 45 percent. Labor Force Malawi has a surplus of unskilled labor. The GOM estimates that over half of the country's 9.7 million people are of working age. However, in 1993, only some 470,000 Malawians earned wages. Wages in Malawi are set by reference to the government's mandated minimum wage scales. Effective September 1993, Malawian minimum wages became Malawi Kwacha (MK) 3.00 per day (USD .43) in the cities of Blantyre, Lilongwe and Mzuzu, MK 2.70 (USD .39) per day in municipalities and townships, and MK 2.40 per day (USD .34) in rural areas. However, both government civil servants and private industrial employees earn higher salaries than the mandated minimums. Although Malawi has a surplus of unskilled labor, there are acute shortages in professional and technical fields. The prevalence of AIDs in this select group has further reduced their numbers. In the latter half of 1993, Malawi experienced periodic labor unrest. Work stoppages and wildcat strikes occurred throughout the country, with striking employees demanding higher wages and increased benefits. Wage increases as high as 30 percent were granted, and the nation's cumulative wage bill increased by approximately 17 percent. With inflation increasing in 1994, further demands for higher wages are expected. New and revitalized unions are now emerging in Malawi. The most active of these are the Teachers Union, the Local Government Workers Union, the Transport Workers Union, and the Hotel and Catering Workers Union. However, the emerging unions have not yet gathered to elect union representatives, developed priorities, or ratified constitutions. The emergence of union activity has not been uniform. The agricultural sector remains untouched. The textile and Railway Workers union - the latter is not part of the new Transport Union - continue as primarily nominal organizations. Local and Third Country Competitors South Africa, the UK, Germany, Japan, and Zimbabwe are the countries from which Malawi sources the most imports. Note: Data on the origin of imports is only available through 1989. Nonetheless, Malawi's present primary sources of imports do not appear to have changed significantly. End Note. Whereas South Africa, Japan, and Zimbabwe tend to emphasize trade in their commercial relationships, companies from the UK and Germany also have substantial corporate investments in Malawi. Lonrho is the most visible British company in Malawi. It holds interests in sugar plantations and production factories, tea plantations and production facilities, textile production, an automobile dealership, and beer production. Standard Charter Bank, a London based institution, is a minority shareholder of Malawi's National Bank. Other British companies are active in the areas of construction, transportation, and insurance. Press Corporation Limited (Press) is a local corporation with interests in almost all sectors of Malawi's economy. Press estimates that it accounts for approximately 25 percent of Malawi's national GDP. Local observers estimate that the amount may in fact be as high as 35 percent of the national GDP. Press's assets, either wholly or partially owned, include interests in tobacco farms and processing firms, the banking industry, retail clothing, a fishing and fish processing business, a national grocery store chain, transportation companies, insurance companies, a number of manufacturing companies, wholesalers, and poultry production. Distribution of Goods and Services The majority of Malawi's population lives in rural areas though urban dwellers tend to have higher incomes. Market surveys for particular products or services would help to clarify whether widespread rural distribution is desirable. Road Transportation - By African standards, Malawi's intercity road network is well developed and well maintained. Goods are commonly distributed by truck. Local individuals and firms utilize their own delivery fleets or independent truckers. Alternatively, the rural road system is inadequate. The great majority of rural Malawian roads are unpaved and rutted. They are often impassable by motor vehicles, even four wheel drive vehicles, during the rainy season (October to March). Malawi prohibits members of the resident asian community from distributing goods in rural areas. This restriction is expected to be lifted in the near future. Air Transportation -- Airports on the outskirts of Lilongwe and Blantyre handle international air traffic. Lilongwe is serviced by British Airways, KLM, South African Airways, Air France/UTA, Air Zimbabwe, and Kenya Air. Air Malawi, the country's national air carrier, transports passengers and freight. Air Malawi connects with international flights to Europe from Johannesburg and Harare. It services regional African destinations as well as domestic routes. Recently Air Malawi has begun expanding its domestic air service. Rail Transportation -- Malawi Railways offers freight services in connection with the Northern Corridor transportation route from Dar Es Salaam, Tanzania. The refurbishing of the Nacala rail line through Mozambique also offers opportunities for international rail freight service. Domestically, Malawi Railways offers freight services between Lilongwe and Blantyre, and from some of the tobacco and tea plantations to either Lilongwe or Blantyre. Boat Transportation -- Transportation by boat on Lake Malawi, with the exception of limited components associated with the Northern corridor route from Dar Es Salaam, is not commercially dependable. There is some discussion within the business community of instituting a river boat transport service from the Shire River to the Zambezi River, and then to the Indian Ocean. These discussions will not come to fruition within 1994. Communication Facilities - Malawi's telecommunication infrastructure is overburdened but, by African standards, relatively good. Most businesses, senior government officers, and tourist class hotels, have working telephones and telefaxes which can transmit and receive both locally and internationally. The GOM has begun a telecommunications upgrade which will increase the number of telephone lines in the cities of Blantyre and Lilongwe. It also has plans to increase telephone capacity in Zomba and Limbe (an industrial suburb of Blantyre), but has not yet secured funding for the project. Major Infrastructure Projects Underway Kapichira Dam - Malawi is building a hydroelectric dam - the Kapichira project - on the Shire river in the southern region of the country. The dam is intended to provide more reliable and cheaper electricity. The total project cost is estimated at USD 55 million.