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    Country profile: Malawi



    Note: This text provides brief description of the conditions foreign business will encounter in trade with Malawi. It is based on a WTO Trade Policy Review for Malawi, early June 2010. Readers wishing for deeper analysis should turn to the original Trade Policy Review available on the WTO website. (www.wto.org/english/tratop_e/tpr_e/tp331_e.htm)

    Trade Policy Reviews are an exercise, mandated in the WTO agreements, in which member countries' trade and related policies are examined and evaluated at regular intervals.



    SUMMARY


    Since the last TPR in 2002, Malawi has made progress in reforming its trade policy regime in the areas of customs procedures, competition policy, government procurement, and privatization of some state-owned enterprises. While the Government recognizes the need for further reforms of the business environment to attract investment, many of Malawi's trade-related laws are outdated and require extensive revision to align them with international best practice. Reform efforts should now also focus on simplifying Malawi's tariff together with its exemption schemes. Moreover, further trade facilitation measures are needed to help reduce Malawi's high cost of transport.

    Malawi's economy is heavily dependent on agriculture and exports of primary commodities. Trade in goods and (non-factor) services rose from 67% of GDP in 2003 to 83% of GDP in 2009, reflecting increased reliance on trade. Malawi has not retreated from its open policy stance in response to the recent global economic crisis.

    Since 2003, real GDP growth has averaged 6.3% per year, and reached 7.7% in 2009. Despite the robust growth, Malawi still has an extremely low per capita income (approximately US$356 in 2009), high prevalence of absolute poverty, and a high reliance on donor funds (about 40% of budget expenditures). The macroeconomic situation remains precarious. There has been considerable rigidity in the exchange rate of the Malawi kwacha, resulting in an over-valued currency and dwindling foreign exchange reserves. There have been periods when acute foreign exchange shortage has adversely affected Malawi's external trade.

    The performance of Malawi's economy remains vulnerable to drought, and terms of trade shocks. Production and exports need to be diversified so that growth is less dependent on exogenous factors, such as the weather. In this regard, the opening of Malawi's first uranium mine at Kayelekera, the largest FDI project in recent years, is a welcome development. Malawi is open to foreign investment and offers EPZ status for non-traditional exports. Procedures for business and land registration, and for obtaining work permits are being streamlined.

    Customs procedures have been modernized using UNCTAD's Automated System for Customs Data (ASYCUDA) and post-clearance audits, but a large proportion of import shipments is still subject to physical inspection at the border. On some products, Malawi applies non-automatic licensing procedures for purposes of infant industry protection (e.g. sugar and wheat flour), and for health, safety, security, and environmental reasons.

    Malawi's tariff bindings average 76.5%, covering 31% of the tariff lines. The applied MFN rate averaged 13.1% in 2009 (compared with a simple average rate of 13.6% in 2001). The applied MFN tariff has six bands, with a maximum rate of 25%. Malawi's tariff is complex because of numerous exemption schemes. The discretionary and non-transparent nature of these schemes also leave room for abuse. Malawi would stand to benefit from a rigorous tariff simplification exercise: a lower and more uniform tariff without exemptions would promote economic efficiency, reduce administrative costs, and possibly raise more tariff revenues.

    The prevalence of preferential rates adds to the complexity of Malawi's tariff. Malawi is a member of the Common Market for Eastern and Southern Africa (COMESA) and the Southern African Development Community (SADC), which have different speeds in terms of tariff elimination. Imports from South Africa - Malawi's main trading partner - are governed by a separate schedule of tariff elimination.

    Substantial progress has been made in implementing competition legislation, with the review by Malawi's competition commission of a series of merger and acquisition cases. Malawi's competition regime should also receive a boost through the establishment of COMESA's regional competition commission in the country.

    Malawi has experienced several food emergencies in recent years; large parts of the population received international food aid in 2005. Accordingly, agricultural development and food security are policy priorities of the Government. Maize is the principal food and subsistence crop, and central to the food security strategy. Like other countries in the region, Malawi has resorted to export restrictions in response to food shortages. To stimulate maize production, the Government has implemented a large-scale programme to subsidize fertilizers for maize and other agricultural inputs (Farm Input Subsidy Programme). Overall, the programme, together with favourable rainfall, has been a success in restoring food security.

    The Farm Input Subsidy Programme has become a considerable fiscal and economic burden. Budgetary expenditures reached a peak of about US$270 million in 2008/09 (close to 5% of GDP), to shield smallholders from escalating international fertilizer prices. Expenditures are partly covered by dedicated budget support from the donor community. In part, the fertilizer subsidies thus constitute fertilizer aid, clearly a more efficient form of aid than food aid. However, as fertilizer subsidies absorb large proportions of Malawi's agricultural budget, there is little room for investments with potentially higher long-term rates of return than fertilizer subsidies, such as agricultural research, irrigation, or measures to reduce maize-crop losses.

    The tobacco industry contributes over 60% of foreign exchange earnings. While Malawi is rightly exploiting its comparative advantage in producing tobacco, it is vulnerable to tobacco control measures that other countries may implement for public health reasons. Cotton being one of its main export products, Malawi has a particular interest in the DDA negotiations on the elimination of trade-distorting domestic support and export subsidies in this sector.

    Services account for slightly less than half of the Malawi's GDP, led by wholesale/retail services, and financial services. Under the GATS, Malawi has made specific commitments in 33 (out of some 160) service sectors, which is slightly more than the average in least developed countries. Malawi's commitments have no limitations on market access or national treatment in modes 1 to 3, while measures affecting the presence of natural persons are unbound.

    Malawi's financial system is stable and has weathered the turmoil in the international financial markets. Malawi is in the process of modernizing its legislation for financial services and consolidating supervisory powers under the Reserve Bank of Malawi. However, the vast majority of the population does not have access to commercial banking services.

    Telecom services have been further liberalized since Malawi's last TPR. The penetration rate for mobile telephone services increased from 0.7% in 2002 to 12.5% in 2008, but remains among the lowest in Africa. The need for enhanced competition among operators by awarding additional operator licences has been recognized. The internet user rate is very low, especially the broadband subscriber rate (estimated at 0.02% in 2008). Infrastructure projects are under way to increase bandwidth supply but Malawi has yet to link up with the rest of the world via East African submarine cable systems, which promise faster and cheaper internet access.

    One of the main growth constraints in Malawi is a significant shortfall in electricity supply. Malawi lacks a transmission infrastructure for importing electricity. It is one of the few SADC countries not yet connected to the regional grid, the Southern African Power Pool (SAPP). As a land-locked country, Malawi naturally faces high transport costs, which impede its export competitiveness directly but also indirectly when the production of export goods requires imported inputs. Trade facilitation, e.g. through one-stop border posts, is thus vital for Malawi to reduce the administrative costs associated with trading across borders. While regional road hauling has been liberalized under COMESA initiatives, transit procedures are lengthy and have yet to be fully harmonized in the region.




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