Moving the Malawi economy forward : pieces of advice to Excellency Chakwera’s government

Advice given voluntarily and objectively harms no one but can benefit many. On matters of economic development in Malawi, it is now apparent that perhaps owing to the effects flowing from domestic factors as well as external ones including the Covid 19 and Russia Ukraine war crises , economic development in Malawi has conspicuously stagnated over the past few years .

The President ought to realize that he has risen at a troubling period when Malawi is at the lowest point in history, socially, economically and politically. Our relations with the outside world are not at their best, our relations within the nation are soured by many bad isms including those of a crony , tribal, religious, and comrade nature, and the economy is mauled by absence of radical changes on the supply side, outright theft of public resources and pervasive economic mismanagement .

These should be the very first tasks the current government should consider addressing to put the nation on a right track to move forward. While the importance of reduced corruption, international relations, good governance and civil liberties for the sustainable development of the nation can never be overemphasized, it is important for the current leadership to pay due cognizance to the fundamental problem that we face as a nation.

This is important because it will help us have a focus in whatever we do as a nation and it will also allow us to take stock of what we have done and measure our progress when the time comes.

The fundamental problem that Malawi as a nation faces at present is one of supply. The supply side of the economy has not had any radical changes since the one party era whereas the demand side of the economy has changed systematically and exponentially with the booming population and the growing middle class which itself is a function of education, donor activities, better business opportunities etc.

The implication of this differential growth of the supply side of the economy and the demand side of the economy implies that foreign exchange shortages as well as other negatives effects of the such shortages must always be expected .

While this theory may not fully explain the recent forex, sugar, and fuel shortages, a set of reasons behind such shortages is incomplete without the differential growth thesis. At the present regime of economic development, this is the fundamental problem and government efforts must focus on striking a balance between the two but essentially by making positive and radical structural changes on the supply side of the economy.

Monetary policy is important, but it surely plays a relatively pale role in the whole scheme of things because of the stage of our economic development as well as the general morphology of our economy at present.

The Nature of our Trade Balance

My examination of the import and export time series data for Malawi up to 2021 unveils that, not only does the country import more than it exports over time, but also that the gap between imports and exports has been widening and even more so, recently such that a slanted V-shape is markedly visible when the two quantities are mapped on a two dimensional space of value and time.

The increasing differential growth of imports and exports, where imports grow faster implies that the nation’s ability to generate foreign exchange (which it gets when it sells to overseas consumers) lags behind its ability to spend it.

Assuming that exports are the major sources of foreign exchange, such a situation inevitably leads to potential foreign exchange shortages. The shortages are even more likely if the growth rate of imports departs significantly from its past levels (that is if there is an extra increase in imports growth while exports stay at roughly past growth rates, or when exports stagnate more than before).

To the extent that fuel imports depend on foreign currency availability it is not unreasonable to expect a case of fuel shortages in other times of the year depending on aggregate foreign exchange demand holding donor funds constant.

The data shows that imports have grown considerably more reaching about 3 billion dollars recently, implying that while the asymmetric growth rates in imports and exports is clearly a problem, there is yet another one. The system appears not to be entirely able to make foreign exchange available on the formal market and hence, while the formal system does not have the foreign exchange, the black market has the money. The inability of the domestic formal foreign exchange market to mobilize foreign exchange relates to the price of the kwacha relative to that of other currencies.

In the event that the kwacha is given a higher value than its actual market value, many of those holding foreign currency shun the formal foreign exchange market in preference to the black markets, which, in those cases are able to offer better prices.

Even after a mild devaluation by this government, evidence reveals that while the bank price of a US dollar is around 1100 Malawi Kwacha now, the dollar is going at closer to 1300 Malawi Kwacha in other areas at the same time, implying an over-valuation of the Malawi Kwacha. It is this differential that repels foreign currency holders from the formal and legal currency market thereby denying the government of the much needed funds to run government business.

So what can be done?

(1) improve relations with development partners and diversity them
The problems of foreign exchange availability could be partially sorted by improving the mix of development partners. This would bring in funding from which would directly help meet the burgeoning demand for foreign exchange. Normalizing and expanding development partner base, entails stamping out corruption, improving spending efficiency , as well as tasking every ambassador with the task of mobilizing technical partners from within his or her jurisdiction.

Provide each ambassador with indicators of performance that include mobilizing financing be it grants, donations or foreign direct investments into Malawi. Manage those ambassadors and their teams by those objectives . No ambassador should go to represent us and return after 5or ten years without anything tangible to show us in terms of fund mobilization.

Of course this is a limited solution in that development /technical partners may have their own goals, tastes and preferences besides the fact that their budgets are finite. The ultimate solution therefore has to be within the control of the nation at large.

(2) Radical changes on the supply side of the economy
The most reliable and effective long term solution is to induce radical structural changes on the supply side of the economy to ensure that the nation is able to generate enough exports that will earn the nation sufficient foreign exchange.

Most of the foreign exchange that comes into the nation is accounted for by tobacco earnings whose contribution stands within the neighbourhood of 300 million US$ annually. The downside of relying on one commodity becomes apparent when one notes that the forecasts for tobacco demand show a future decrease in tobacco consumption mainly due to the anti-smoking lobby, and also because the major consumers of cigarettes will no longer be the affluent buyers of Western countries but rather developing countries which are predominantly poor and may not pay higher prices.

Developed countries have stepped up their efforts to reduce tobacco consumption owing to increasing incidences of cancers of different kinds among smokers in those countries, and not surprising their aggregate demand is projected to decrease even further.

Among the emerging countries, China, which has a larger tobacco market, also appears to be set to increase its own domestic production implying that the future tobacco market may be uncertain.

a. Non-traditional crops and associated technology
Policy makers in Malawi therefore need to seriously think about introducing, and encouraging the adoption of high yielding varieties of non-traditional crops such as soybeans, cowpeas and other oilseeds (biofuels). This is because given the ever increasing prices of crude oil, Western efforts for increasing biodiesel and solar energy will continue to increase.

Moreover as economies of China and India continue to grow together with their livestock industry, their demand for vegetable oils, soybean oilcakes and other crop based feedstuffs may be set to increase.

Malawi needs to acquire technology (including post-harvest technology) in terms of high yielding varieties of those non-traditional crops and wage a campaign for their mass adoption paralleled with helpful extension services.

As agricultural exports in their raw form suffer from lowering net terms of trade in the long run due to various issues, so value adding is an important factor to consider in any bid to radically transform supply side.

As far as soybeans and other oil crops are concerned, the country should consider developing its capacity in crushing so that both soy/groundnut products and seeds are exported. This cushions farmers and the nation from world market price fluctuations. It cannot be over-emphasized that these efforts need to be paralleled with advances in small-scale irrigation to divorce farmers from overdependence on rain-fed agriculture.

b. Mining , manufacturing , services
Agriculture must be seen as a first step only in any future economic success … the sectors that must characterize our economy in future are services, manufacturing , mining and banking

While addressing issues of technology and marketing in the agricultural sector are important in the equation, the nation should seriously consider mineral explorations. As I have argued elsewhere before, a quick look at a list of Africa’s successful countries reveals that mineral rich countries account for the bulk of the few well-to-do African countries.

Of course there are some resource rich countries that are poor due to mismanagement or foreign intervention, but the proportion of promising resource poor countries is small underscoring the importance of minerals for Africa’s economic development. Botswana, Zimbabwe, RSA, Mozambique etc have all benefited one way or another from mineral endowments.

Malawi lies on the Great Rift Valley and has a fair share of little mountains where crude oil and some minerals form. While bearing in mind that minerals can be a curse if mismanaged, I would seriously urge the government to intensify its mineral mapping and exploration and mining efforts, while paying due cognizance of the negative effects, that mining could afflict on the environment of course. The contribution of the Karonga Uranium mine to the GDP under poor contractual arrangements already signals that mining could be very crucial for the economy.

c. Entrepreneurship
For the long term, there must be a deliberate effort to encourage export-oriented entrepreneurship. This could be done not only by government’s taxation policy and other efforts, the third sector could also play a vital role. NGOs need to have programs that aim to give their clientele an ability to be part of the exporting community where possible and strengthen agricultural or general value chains. Education programs should also be tailored to develop entrepreneurial skills in future graduates.

(3) Sensible changes on the demand side
The demand side of the economy needs to be controlled in manners that will not reduce peoples’ welfare. The following can be considered:

a. Import substitution where possible
While it would be unreasonable to try to produce everything, some items that demand foreign exchange constantly are those which could be domestically produced. The government and the private sector need to do what it takes to intensify efforts to erect plants for sufficient cement and even fertilizer production and ensure that these are available domestically at reasonable prices. These will save foreign exchange. Malawians are building houses everywhere and the resultant demand for cement and other foreign building materials poses pressure on forex.

b. Monetary policy instruments
In some cases a monetary solution to easing a country’s foreign exchange position is to depreciate (not recommended at present ) the value of the domestic currency. In the present case where the dollar is trading at a higher price on the black market, the Central Bank can reduce the official price of the Malawi kwacha so that a dollar should start fetching something more.

The theoretical positive effects are that such an action would encourage those with foreign currency to trade it on the formal market and that producers could gain because they would face better world prices.

Depreciation could also punish imports of luxuries hence could control the growth in import demand. However, this is not without problems. In the first place there is no guarantee that once the currency is depreciated enough dollars will be released on the currency market. It may as well be that people will still go to the black market which will still try to hike its prices.

Others may still hoard their dollars as they prospect future depreciations. More importantly, whether depreciation would indeed benefit the exporters which in Malawi’s case are farmers, is not straightforward because, while they may face better prices, farm inputs would become very expensive, and inflation would go up.

Very high inflation would not only eat into everyone’s incomes, but could even have a more negative effects unfortunately on those that society ought to protect-the poor. This would discredit those in power and also significantly undermine future production and exports.

But as this is a condition for unlocking donor support, there is need to depreciate the currency albeit while engaging the donors fully to ensure that they are part of the solution for any problems that could arise following any major depreciation.

Lower interest rates and eco outage economic activities . An economy only grows with action . If banks don’t lend money because cost of borrowing is high, it won’t go anywhere.

Beyond Subsidies: Industrialization
The need for industrialization in Malawi is real, although a debate about the means through which it may be achieved is on-going. Here I purport to flag the importance of launching an technology /skills , agricultural and mining-led industrialization program to offset the effects of any future decline in agricultural and mineral terms of trade for Malawi.

Going forward let it be known that the West (developed world) spends more than 380 billion US dollars on agricultural subsidies annually to bolster the incomes of their farmers in order that they maintain an artificially high level of prosperity. This is a substantial amount of money that cannot even be compared to the total aid that flows to Africa or developing world annually!

For instance in 2007, the total official development assistance from the West to all poor countries amounted to circa US$123 Billion, which is less than half their spending on subsidies.

In view of this, arguments about the need for countries like Malawi to remove all barriers to international trade are at best misleading and far from helpful because of the fact that Malawi as well as Africa’s trading partners in the West do subsidise their agricultural sectors to a great deal.

But, the government ought to note that revolutionising agriculture sustainably and for the good of the whole nation both now and inter-temporally requires another step beyond subsidizing agricultural inputs.

Firstly, you don’t spend that which is not yours. If you are to subsidize fertilizer use your own money and that way it will be easy to act within reasonable limits

Secondly, make any agricultural support programs a loan to farmers in a manner of a revolving fund. Any transfers the government makes to the sector and indeed whichever sector , must demonstrate a positive rate of return and must pay back the money advanced thereto. Growing up we had the fertilizer revolving fund . We need to consider innovating at least as that way .

There is a need to support struggling sectors while endeavouring to take advantage of the strong backward and forward linkages that the agricultural sector has with the other sectors to avoid being stuck in the agricultural sector alone, while exporting unprocessed commodities. There is need to launch what we may call ‘agricultural , technology and mineral-led manufacturing rebirth’ or more simply ‘agricultural/skills -mineral-led industrialization’.

The problem with solely relying on raw materials in the long run emanates from the very nature of raw commodities (e.g. agriculture) and trade. Even in our households, we rarely proportionately increase green maize and nsima consumption when our incomes go up or when the price of maize goes down, or to be precise, any increase we may register would be less, relative to the change in our incomes or prices of maize flour.

At the macroeconomic level of course that implies that expenditure on agro-goods does not rise at the same pace as the expenditure on manufacturing goods and services.

In other words, when world incomes go up, economies that rely on unprocessed agricultural exports alone or primarily are likely to come out as losers of international trade. The problem is the same with minerals in their raw form.

In addition to the implied income inelasticity of demand for agricultural goods alluded to above, the terms of trade for agricultural goods in the absence of processing do deteriorate dynamically, sometimes due to oversupply.

In the absence of an active manufacturing sector that draws its raw materials from the mining and agricultural sectors, in some cases agricultural and mining growth could be immiserating.

To ensure this does not happen at any point and to ensure that subsidies have a lasting positive impact, there is need to rebuild the manufacturing sector which would get its inputs from agriculture. This would further imply that even in the event of a decline in agricultural/mineral unprocessed goods’ Terms of Trade, Malawi would have all the incentives to increase productivity in the mining and agricultural sectors as the nation would be exporting processed products, and there would be no immiserating growth.

On the agriculture side, although farm parcels are smaller in some areas, we must try where possible to reclaim marginal land including wetlands to try and expand total farmland. We should also aggregate them to perming meaningful mechanization .

We should then seriously think about taking advantage of transgenic technology and irrigation possibilities to increase total factor productivity. To avoid immiserating growth and ensure intertemporal sustainability, we should send the excess supply from agriculture into the manufacturing sector .

The other importance of a vibrant manufacturing/industrial sector is that by providing jobs to both skilled and unskilled personnel, the manufacturing sector has the potential to meaningfully depopulate the rural areas and thereby freeing up more land per capita. There should be enabling environment for encouraging the private and third sectors to participate fully in the drive for increased exports.

It may look bizzare to suggest that the third sector (CSOs) has a role in this, but it turns out that real positive changes on the supply side can be had if the state, private and third sectors work in unison. Together, the three sectors are larger than the sum of their individual parts

Civil Service

The civil service is very inefficient and deliberately slow , and so are many parastatals . Without mentioning examples , note that in some of these parastatals , it can take as long as 2 years for a transaction that should normally take one month only , to complete.

The reason is partly that no one or too few in those institutions really know why they are there and how their supposed pieces of work feed into others in order to contribute to greater institutional goals… obviously some of these may be sorted by supervision and training but a good part can only change with serious legislative reforms .

Unless these change their ways, 10 years from now, Malawi will be at this same place … low Labour productivity, volatile exchange rates , inflation , no forex , low incomes, untold poverty , and a mushrooming of a few rich people whose major sources of wealth is theft of government resources .

Can we therefore please place the right people in the right places and hold them to account when they fail to deliver even if they may be comrades, it’s such accountability that will ensure progress .

I should finish by saying again, no one loses by trying to do things differently and positively … good advice given for free has to be cherished and not everyone who advises in this manner cannot do without a government job . My wish, as has always been , is that ‘this’ government succeeds !

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