VII. Investment Climate Malawi has earned the reputation as a country which is hospitable to foreign and domestic investment. Constitutionally a one-party state since 1966, Malawi is currently immersed in a national political debate to determine whether multiple political parties should be introduced. The outlook for a peaceful resolution remains good. In may, 1992, international aid donors, including the United States, decided to reduce assistance to Malawi in response to Malawi's relatively poor human rights record. Nonetheless, U.S.-Malawi relations are good, and the two countries continue to pursue diplomatic relations at all levels. As a result of structural and external economic pressures during the first half of the 1980s, Malawi embarked on an extensive economic reform program to increase macroeconomic efficiency and performance. In addition to providing price incentives and improved market facilities for smallholder crops, the government has moved to reform or divest parastatals, eliminate many agricultural input subsidies, reduce the role of the public sector in the economy by reducing the public sector deficit, and dramatically reducing public sector domestic borrowing. The country's structural adjustment program with the IMF and World Bank was largely successful during its first three years, leading to an unusual fourth year extension of the program. In 1991, this small landlocked country achieved a real gross domestic product growth rate of 7.8 percent. However, more recently, Malawi has not been able to agree to terms with the Imf to release a last tranche of funds, and its GDP is estimated at negative 7.7 percent for 1992. A number of factors combined to make 1992 a particularly difficult year for Malawi's economy. Chief among them were the severe drought in southern Africa, poor tobacco sales on the world market, increasing pressure on arable land due to high population growth rates, a continuing influx of refugees caused by the civil war in Mozambique, and a decrease in donor assistance. Hardest hit has been the country's agricultural sector, from which over 85 percent of Malawi's 9.5 million people derive employment and sustenance. Malawi is generally fortunate to possess moderately fertile soil, a favorable climate, and generally adequate rainfall. Traditionally, agricultural production accounts for 36 percent of GDP and over 85 percent of exports. Malawi's chief exported agricultural crops are tobacco, tea, cotton, and sugar. Given favorable climactic conditions, Malawi can be self-sufficient in staple foods. Unlike last year, rainfall in the present growing season is promising and, if current patterns prevail through the end of March, an above- average crop is expected. A critical factor affecting any economic decision in Malawi is the cost and reliability of transport. Malawi's cheapest and potentially fastest routes to the sea are via low-cost rail links to the Mozambican ports of Nacala and Beira. The tete corridor, a road link through Mozambique to the Zimbabwian capital or harare, also is of significance. The emerging peace in Mozambique bodes well for Malawi's outlook in this sector. Some firms in Malawi are already making use of the Nacala rail line, although the rail's operations remain erratic. A road/rail link to the Tanzanian port of Dar es Salaam has seen increasing development and use during 1992. A permanent resolution to the Mozambican conflict is also expected to alleviate Malawi's refugee burden. Approximately one million refugees are presently living in Malawi. However, appreciable numbers of refugees have not yet begun returning permanently to their former homes. Malawi continues to encourage foreign private investment. BY sub-saharan african standards, the Malawian telecommunications network is relatively reliable and corruption is relatively low. The Malawi government attempts to provide new investors with a selection of incentives ranging from tax holidays, rebates, duty waivers, etc. Although there are few legal restrictions on the repatriation of after-tax profits, recent shortages in foreign exchange holdings have created delays in remittances. During 1991, the government of Malawi passed a new investment bill which established the Malawi investment promotion agency (MIPA) - a one stop investment facility. Mipa's mandate is to streamline bureaucratic requirements for new investors. To date, the legislation has not been implemented but the government's positive attitude towards foreign investment remains unchanged. Malawi's traditional trading partners are britain and south africa. Malawi importers do express interest in a wide variety of U.S. products, ranging from chemicals, electronic goods, computers, and word processors to hair care products. Historically, however, U.S. exporters have not been significantly interested in Malawi because of the country's small market and remote location. Recent import liberalization trends have encouraged some U.S. firms to enter the Malawian market. A number have opted to service Malawi from their operations in Zambia or South Africa. Malawi continued to benefit from on-going bilateral and multi- lateral assistance programs. Opportunities for U.S. companies to bid exist for projects in the areas of: design of a fertilizer plant, mining of coal, bauxite, and gypsum, and development of forestry products. End Quote. Conditions in Malawi have changed markedly since our last report. The country is now a functioning multiparty democracy led by President Bakili Muluzi, the leader of the United Democratic Party. Donors have resumed full assistance programs. Although the rains of 1992/93 were sufficient to produce a bumper maize crop, the rains in 1993/94 were poor and agricultural production is below levels consumed by the national population. The rail link to Nacala is functioning, but rehabilitation continues and freight volumes have not not been as high as hoped. The Malawi Kwacha now floats against international currencies, and has depreciated considerably. Inflation is up. Corruption is more prevalent. Malawi's tobacco auctions are conducted in U.S. dollars. A national labor movement is emerging. The government's positive attitude towards foreign investment persists, however, as does its adherence to its structural adjustment goal.