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MMAALLAAWW II EE CC OONNOOMM II CC GGRROOWWTTHH SS TT RRAATTEEGGYYVVOOLLUUMMEE II II ::July 2004Ministry of Economic Planning and DevelopmentP.O Box 30136, Lilongwe 3 MalawiTel. (265) 01 788 888Fax: (265) 01 788 247E-mail: epd@malawi.net
Malawi Economic Growth StrategyFOREWORDThis Malawi Economic Growth Strategy reflects a joint realisation by Governmentand the private sector that the economy has been registering low or negative growthand that something has to be done in order to reverse the trend. The rationale forgrowth and diversification for Malawi is compelling because rapid broad-basedgrowth is necessary to reduce poverty. Rapid broad-based growth will expand thesectoral sources of growth, deepen and sustain the gains to be made fromsmallholder agriculture in leading growth and poverty reduction, and make theeconomy less susceptible to external shocks like weather, changes in terms of trade,political developments in the region, and fluctuations in external aid flows.However, existence of low per capita income and high inequality implies that highfuture economic growth should be complemented by equity policies.In April 2002, Malawi launched the Malawi Poverty Reduction Strategy Paper(MPRSP) that aims at meaningfully reducing poverty by empowering the poor. TheMPRSP is built around four strategic pillars, the first of which emphasises thepromotion of sustainable pro-poor growth. However, many stakeholders, includingthe private sector, have observed that policies to fulfil this strategic objective areinsufficient to achieve the sustained annual economic growth of at least 6 per centper annum required to reduce poverty by half by the year 2015.In view of the foregoing, the Ministry of Economic Planning and Development(MEPD) set up a Task Force to formulate a Malawi Economic Growth Strategy inclose cooperation with the private sector. Political will and leadership are critical tothe success of this Strategy because it will ensure that the right macroeconomicconditions and legal and regulatory environment exist within which economicgrowth, investment and trade can take place. Government has a central role insetting policies and channelling resources to ensure a conducive macroenvironment.The Malawi Economic Growth Strategy has been based on a realistic assessment ofthe resources available. It focuses on strategies and actions that do not requiresubstantial additional spending by Government, but can be achieved throughrefocusing existing resources and by developing a more conducive set of policies thatwill stimulate the private sector investment and trade in the immediate future.However, in the medium term, donor organisations will have a key role to play increating the conducive environment for economic growth by supporting policyreforms and providing resources to support government during the transitionalperiod.David Faiti., M.PMINISTER OF ECONOMIC PLANNINGAND DEVELOPMENTVolume IIi
Malawi Economic Growth StrategyACKNOWLEDGEMENTSThe Malawi Economic Growth Strategy was developed by a Task Force led by theMinistry of Economic Planning and Development (MEPD). The Task Forcecomprised experts from key institutions within Government, the University and theNational Action Group (NAG) Secretariat, which represented the private sector. TheTask Force members were:Mr. Alex GomaniMinistry of Economic Planning and Development(Chair of the Task Force)Ms. Fanny M'bawaMinistry of Economic Planning and DevelopmentMr. Thomas MunthaliMinistry of Economic Planning and DevelopmentProfessor Ben KaluaUniversity of MalawiMr. Steven BandaMinistry of FinanceMr. Nebert NyirendaMinistry of FinanceMs. Tressa Namathanga Ministry of Tourism, Parks and WildlifeMr. Grain MalungaDepartment of MinesMr. Mufwa MunthaliMinistry of Commerce and IndustryMr Chris KachizaMinistry of Commerce and IndustryMr. Patrick KanyimboMinistry of Commerce and IndustryMr. Timothy ShawaMalawi Investment Promotion AgencyMr. Alick NyasuluNational Statistical OfficeDr. Wilson BandaReserve Bank of MalawiDr. Charles MatayaMinistry of Agriculture, Irrigation and Food SecurityMr. Jason AgarKadale Consultants Ltd.Mr. John McGrathImani Development (Malawi) LtdI acknowledge the considerable work of Task Force members in providinginformation and drafting key sections of this document. On its part, the Task Forcewould like to acknowledge the considerable inputs received from stakeholders fromthe public and the private sectors in preparing this Malawi Economic GrowthStrategy. There were many consultations with individuals and organisations toensure that the different issues constraining economic growth in the country arereflected in the Malawi Economic Growth Strategy and that appropriate strategieswere formulated to address them.I also acknowledge the role of Dr Zaki Chalira, who, as the Director General of theNational Economic Council and Department of Economic Planning andDevelopment, provided his guidance for the large part of the process and also thankMr Francis M’buka from the World Bank and Mr R. M. Jiah from Ministry ofTourism, Parks and Wildlife for their contributions. We are also indebted to thefinancial support provided by the United Nations Development Programme (UNDP)in the development of the Economic Growth Strategy. Finally, we thank all thosewho commented on and contributed to the various drafts of this Strategy.Patrick C. KamwendoSECRETARY FOR ECONOMIC PLANNING AND DEVELOPMENTVolume IIii
Malawi Economic Growth SEVolume IIAgricultural Development and Marketing CorporationAfrica Growth Opportunities ActBusiness Residence PermitCountry Economic MemorandumCommon Market for Eastern and Southern AfricaDanish International Development AgencyDevelopment of Malawian Entrepreneurs TrustDepartment for International Development (UK)Diagnostic Trade Integration (Study)David Whitehead and SonsEverything But ArmsEuropean CommissionEconomics Association of MalawiEuropean Investment BankExport Processing ZoneElectricity Supply Company of MalawiEuropean UnionFood and Agriculture OrganisationFree on BoardFree Trade AreaGross Domestic ProductGovernment of MalawiGrain and Milling Co.Garments and Textile Association of MalawiInternational Monetary FundInformation, Technology and CommunicationJapan International Co-operation AgencyLeast Developed CountryMalawi Social Action FundMalawi Social Investment ProgrammeMalawi Business Coalition against HIV/AIDSMalawi Bureau of StandardsMalawi Confederation of Chambers of Commerce and IndustryMalawi Development CorporationMalawi Entrepreneurship Development InstitutionMalawi Export Promotion CouncilMinistry of Economic Planning and DevelopmentMicro-finance InstitutionsMalawi Investment Promotion AgencyMalawi Industrial Research Technology Development CentreMalawi Mozambique Tanzania ZambiaMinistry of Agriculture, Irrigation and Food SecurityMinistry of Commerce and IndustryMinistry of FinanceMalawi Poverty Reduction Strategy PaperMalawi Revenue AuthorityMalawi Rural Finance CompanyMicro and Small Enterprisesiii
Malawi Economic Growth TCCTEPTEVETAUNDPUNIDOUSAIDWTOMalawi Telecommunications LtdMinistry of Tourism, Parks and WildlifeNational Aids CommissionNational Action GroupNational Smallholder Farmers Association of MalawiNon-Governmental OrganisationsNational Roads AuthorityNational Statistical OfficeOverseas Development AssistancePay As You EarnPublic Sector Investment ProgrammeReserve Bank of MalawiSouthern African Customs UnionSouthern African Development CommunitySmall-scale Enterprise Development Organisation of MalawiSmallholder Farmer Fertilizer Revolving Fund of MalawiShire Highlands Milk Producers AssociationSmallholder Tea AuthorityStabilisation System for Export EarningsSmallholder Tea CompanySugar Corporation of MalawiTea Association of MalawiTobacco Association of MalawiTobacco Control CommissionTemporary Employment PermitTechnical Entrepreneurial and Vocational Education Training AuthorityUnited Nation Development ProgrammeUnited Nations Industrial Development OrganisationUnited States Agency for International DevelopmentWorld Trade OrganisationDEFINITIONSTransitional PeriodRefers to the period from the time this Economic Growth Strategy will beimplemented until sufficient economic growth is realisedMacro-environmentRefers to crosscutting issues like infrastructure, macroeconomic and social situationincluding HIV/AIDS pandemic, and general policy framework.Volume IIiv
Malawi Economic Growth StrategyTABLE OF CONTENTSForeword .iAcknowledgements.iiAcronyms. iiiDefinitions . ivAbout This Report .viiiChapter One: Overview of the Economy.11.1Introduction.11.2Structure of the Economy .11.3Recent Economic Developments .21.4Prospects for Growth.5Chapter Two: Cross-Cutting Constraints.92.1Introduction.92.2Poor Macroeconomic Conditions .102.3Inefficient Tax and Incentive System.102.4Poor Infrastructure.102.5Poor Private and Public Co-operation and Dialogue .102.6Weaknesses in the Human Resource Base.112.7Strategies.11Chapter Three: Framework.143.1Introduction.143.2Need for Political Will .153.3Stable Macroeconomic Policies.153.4Trade .163.5Domestic Supply of Internationally Competitive Goods and Services .163.6External Environment .173.7Clearly Defined Role of Government .183.8Favourable Climate for Private Enterprises .183.9Quality of Public Institutions .183.10Skilled Human Resources.193.11Economic Empowerment Programme .193.12Resource Considerations .19Chapter Four: Trade Strategy .204.1Overview .20Volume IIv
Malawi Economic Growth Strategy4.2Major Constraints Affecting Growth of Trade.204.3Proposed Strategy to Stimulate Trade.21Chapter Five: The Agriculture Sector.235.1Overview .235.2Agriculture and Irrigation Strategy.235.3Priority Agricultural Sub-sectors and Strategy .25Chapter Six: The Tobacco Sector.276.1Introduction.276.2Performance .276.3Threats .286.4Strategies.306.5Implementation .31Chapter Seven: The Tea Sector .327.1Introduction.327.2Current Performance .327.3Marketing .337.4Investment in Replanting, Factories and Irrigation .347.5Smallholder Tea Growers .367.6Smallholder Growing Costs .377.7Constraints.387.8Strategies and Actions .397.9Implementation Process .42Chapter Eight: The Sugar Sector.438.1Introduction.438.2Future Prospects .448.3Global Competitiveness ion .46Chapter Nine: The Cotton Sector.479.1Introduction.479.2Cotton Production in Malawi .479.3Pre-treated Seeds .499.4Marketing .509.5Cottonseed .51Volume IIvi
Malawi Economic Growth Strategy9.6Biotechnology in Cotton .529.7The World Cotton Market .529.8Linkages between Textiles and Garment Industry.559.9Cotton Council tation .58Chapter Ten: The Mining Sector .5910.1Introduction.5910.2Potential Demand for Mineral Products.6010.3Production of Implementation .66Chapter Eleven: The Manufacturing Sector .6811.1Introduction.6811.2Policy Background .6811.3Structure of the Sector and Implications.6911.4Opportunities and Constraints .71Chapter Twelve: Textiles and Garments .7312.1Introduction.7312.2Textiles Analysis.7312.3Garments/Apparel Analysis.7412.4Trade Agreements.7412.5Transportation tation .79Chapter Thirteen: The Agro-processing Sub-sector.8013.1Introduction.8013.2Canning And Preserving Fruit and Vegetables .8013.3Rice Processing.8113.4Cassava.8213.5Macadamia and Other Tree Nut Processing .8313.6Other Potential Food Processing Investment Areas .83Volume IIvii
Malawi Economic Growth lementation .85ChapterFourteen: The Tourism Sub-sector.8614.1Introduction.8614.2Performance tation .92Chapter Fifteen: Refocusing of Public Sector Institutions.9415.1Introduction.9415.2Support Organisations.9415.3Regulatory/Enforcement Agencies .9515.4Development Finance Institutions .9515.5The Public Sector Investment Programme.96Chapter Sixteen: The Private Sector Investment Strategy .9716.1Current Situation .9716.2Private Sector Investment Constraints .9716.3Investment Promotion Strategy.98Chapter Seventeen: Implementation .100Appendix 1: Draft Investment Incentives .103REFERENCES .108About This ReportThe Malawi Economic Growth Strategy reportis published in three volumes:Volume I: Summary ReportVolume II: Main ReportVolume III: Action PlansThe Economic Growth Strategy aims for a 6per cent per annum increase in GDP. TheReport documents constraints, strategies andaction plans to achieve this. It looks at broadconditions such as the utions,andpublic-privatesectordialogue. It also identifies specific sectors andsub-sectors for increased attention. These areVolume tiles/GarmentsMining & QuarryingThe shaded words are core sectors/subsectors, so classified because of their longstanding prominence in Malawi’s economy.The others are classified as “high growthpotential” sectors and sub-sectors. To avoidcumbersome phrasing, all will be referred toas “sector” instead of sub-sector or sector astechnically appropriate.viii
Malawi Economic Growth StrategyCHAPTER ONE: OVERVIEW OF THE ECONOMY1.1INTRODUCTIONIn April 2002, Malawi launched the Malawi Poverty Reduction Strategy Paper(MPRSP) that aims at meaningfully reducing poverty by empowering the poor. TheMPRSP is built around four strategic pillars, the first of which is the promotion ofsustainable pro-poor growth. However, many stakeholders including the privatesector have observed that policies to fulfil this strategic objective are insufficient toachieve a sustained annual economic growth of at least 6 per cent required to reducepoverty by half by the year 2015.In view of the foregoing, the Ministry of Economic Planning and Development(MEPD) set up a Task Force to formulate a Malawi Economic Growth Strategy inclose co-operation with the private sector. Political will and leadership are critical tothe success of this Strategy because Government has a central role in setting policiesand channelling resources to ensure that conducive macro, legal and regulatoryenvironments exist within which economic growth, investment and trade can takeplace.This Malawi Economic Growth Strategy is published in three volumes. Volume I ofthis document is a summary of the seventeen chapters featured in Volume II, whichoutlines the detailed analysis of the economic growth framework including themacroeconomic situation, trade strategy, proposed investment incentives, and theconstraints facing and strategies recommended for the core and high growthpotential -sectors. Volume III provides in table format the details on the actionplans.1.2STRUCTURE OF THE ECONOMYThe Malawi economy remains agro-based with the agriculture sector accounting forover 38.6 per cent of GDP, employing about 84.5 per cent of the labour force andaccounting for 82.5 per cent of foreign exchange earnings. Agriculture ischaracterised by a dual structure consisting of commercial estates that grows cashcrops and a large smallholder sub-sector that is mainly engaged in mixedsubsistence farming. Maize, the staple food, accounts for 80 per cent of cultivatedland in the smallholder sub-sector. The main agricultural export crop is tobacco,followed by tea, sugar and coffee.The manufacturing sector is small at 11.0 per cent of GDP and declining.Manufacturing comprises mainly agro-processing activities, including of tobacco, teaand sugar. Distribution and services represent about 22.0 per cent each over 19982002 period.Volume II1/106
Malawi Economic Growth Strategy1.3RECENT ECONOMIC DEVELOPMENTSSince December 2000, Malawi has been implementing an economic programmewith support from the IMF under the Poverty Reduction Growth Facility (PRGF)aimed at restoring macroeconomic stability, which is a prerequisite for sustainablepoverty reduction. However, the programme went off track in November 2001 dueto fiscal slippages that prompted donors to withhold budgetary support. This ledGovernment to rely on domestic financing to finance the budget deficit.The economic performance in 2001 was weak. Real GDP growth contracted by 4.1per cent in 2001 mainly due to the drop in maize production following the drought.Inflation and interest rates remained high at 27.2 per cent and over 40 per cent,respectively, and the fiscal deficit including grants widened to 7.7 per cent of GDP inthe 2001/02 fiscal year in contrast to 2.0 per cent in 2000/01. In the external sector,while the current account deficit excluding official transfers remained stable at 10.4per cent of GDP, gross official reserves declined to the equivalent of 3.7 months ofimports of goods and nonfactor services, reflecting the impact of suspension ofbalance of payments support by donors.Against this background, Government formulated the economic programme for the2002/03 fiscal year focused on the need to continue pursuing the country’s mediumterm development strategy which seeks to reduce poverty through increased accessto basic social services, accelerating growth, improving productivity in agricultureand the manufacturing sectors, enhanced internal security and ensuring existence ofa stable macroeconomic environment. Consistent with these objectives, theprogramme aimed at achieving real GDP growth of around 2.0 per cent in 2002 and4.5 per cent in 2003; and an average inflation of 9.4 per cent in 2002 and 5.0 percent in 2003.To meet these ends, Government planned to reduce the overall deficit to 1.4 per centof GDP from 7.4 per cent of GDP in 2001/02 fiscal year. At the same time, theReserve Bank of Malawi would maintain a tight monetary policy stance in order toachieve the inflation target. In pursuit of this policy stance, the Reserve Banktargeted the year-end reserve money growth to reach 8 per cent by December 2002.In addition, Government planned to implement parastatal reforms to reduce theirfiscal impact on the budget. However, the implementation of the economicprogramme for the 2002/03 fiscal year proved difficult mainly because of thenarrow revenue base and lack of budget support resulting from the withholding ofbudget support by donors. In addition, the expenditure overruns and maize importsalso significantly contributed to the growth of the overall budget deficit.Fiscal policy became more expansionary with adverse consequences on theeconomy. The fiscal deficit including grants
MMAALLAAWWII EECCOONNOOMMIICC GGRROOWWTTHH SSTTRRAATTEEGGYY VVOOLLUUMMEE IIII:: July 2004 Ministry of Economic Planning and Development P.O Box 30136, Lilongwe 3 Malawi Tel. (265) 01 788 888 Fax: (265) 01 788 247 E-mail: epd@malawi.net
