Malawi

Macroeconomic policy performance has been generally consistent and strong although government commitment weakened as the country approached and held 2009 presidential and parliamentary elections. Domestic revenue performance was robust at an estimated 29.8% of gross domestic product (GDP) in 2009/10, buoyed by recent institutional and administrative tax reforms. The creation of the Large Tax Payers Unit and the expansion of the auditing function under the Malawi Revenue Authority have helped improve the efficiency of tax mobilisation. However, an escalation in domestic debt which increased domestic interest payments and expansion of the fertiliser subsidy well beyond initial budget plans offset the benefits of the strong revenue performance, widening the fiscal deficit to 5.4% of GDP in 2009.

Malawi’s pursuit of a de facto fixed (pegged) exchange rate policy from 2006 to late 2009 made it difficult for the Reserve Bank of Malawi (RBM) to clear the foreign exchange market at the official exchange rate, causing import demand backlogs and serious forex shortages. Foreign reserves became precariously low in 2009 falling to 0.6 months of imports. The authorities have renewed their commitment to policy reform, announcing measures for exchange rate liberalisation and fiscal consolidation to help build foreign reserves.

The May 2009 presidential and parliamentary elections were declared free and peaceful giving President Bingu wa Mutharika and the Democratic Progressive Party (DPP) a mandate for a second term of office. Women won 21% of the seats, increasing their representation by 50% from the 2004 to 2009 Parliament. Following the elections, President Mutharika replaced his core economic management team with new appointments for Minister of Finance, Reserve Bank Governor and Secretary to the Treasury.

The DPP has a working majority in parliament that facilitated smooth approval of the 2009/10 national budget and a number of financial bills carried over from the politically tenuous 2004-09 Parliament. Using its majority in parliament, the DPP passed a number of bills in the November 2009 sitting that raised concern among the civil society groups, including the bill that gives the president the power to decide when to hold local elections and the bill that gives him the power to fire the vice-president.

As one of the Least Developed Countries in the world, poverty remains a key challenge in Malawi.  Real per capita GDP at 2000 prices stood at 189 US dollars (USD) in 2009.  Progress has been made in tackling poverty and other social challenges, however, in line with the Millennium Development Goals (MDGs), and within the framework of the Malawi Growth and Development Strategy (MGDS). Increased household food security and falling poverty have complimented strong macroeconomic performance. The government of Malawi estimates that the poverty headcount has fallen from 52.4% in 2005 to 40% in 2009. Overall well-being remains low, but is improving, as measured by the United Nations (UN) Human Development Index (HDI) score of 0.493 that ranks Malawi at 160 out of 182 countries in 2009, up from 164 out of 177 countries in 2007/08. The authorities acknowledge that, while progress has been made, MDGs on achieving universal primary education, gender equality and women's empowerment, and improving maternal health remain elusive.

Malawi has weathered the impact of the global economic crisis relatively well. Estimated at 7%, growth in 2009 remained robust although slower than the 9.8% achieved in 2008. Strong maize and tobacco harvests, and the start of the uranium production helped anchor the economy’s resilience. The strong agricultural performance was largely driven by good weather and the government’s fertiliser subsidy for the smallholder farmers who contribute 70% of agricultural GDP. The 2008/09 season produced a 19% increase in tobacco production and a surplus of 1.3 million metric tons of maize. In its first year of export, proceeds from uranium in 2009 were estimated at USD 24 million, which earned the government about USD 2.5 million in royalty and tax revenues.  The strong performance in the wholesale and retail trade benefited from an increase in household incomes following relatively high tobacco prices by historical comparison and a maize surplus.

Malawi’s financial sector is weakly integrated into the global financial system making the economy relatively resilient to the global financial crisis. The capital market is closed and foreign banks own a 22% share of banking assets.  The National Bank of Malawi, the country’s largest bank, has full domestic private ownership. A decline in total claims of international banks on Malawi from USD 97 million in Dec 2008 to USD 45 million in March 2009[1] does suggest there was some impact on the banking sector. While this may be attributed to the crisis, it may also have been a response by international lenders to payment delays by Malawian banks resulting from serious foreign exchange shortages in 2009.  Average weekly purchases of foreign exchange by all authorised dealer banks were the lowest in three years at USD 23 million per week, compared to USD 43 million and USD 33 million in 2008 and 2007, respectively.

The impact on the real sector appears to have been relatively stronger. Tobacco export earnings fell by 2.8% in 2009, owing to a reduction in the average price of tobacco from USD 2.42 per kilogram in 2008 to USD 1.87 per kilogram in 2009. Despite the fall, prices were still above the average for the past five years.  Government intervention in the tobacco market through minimum price setting makes it difficult to fully determine the impact of the crisis on the tobacco prices.  Tobacco production, at 232 million kilograms in 2009, was 19% higher than in 2008. The high production made up for the fall in prices. The impact on cotton was more significant as world prices fell more sharply. In March of 2009, they were 35% lower than their peak in 2008. In 2009, leading cotton buyers were offering 42 Malawi kwacha (MWK) per kilogram, despite the government’s set minimum price of MWK 75 per kilogram. Government later reduced the minimum price to MWK 60 per kilogram which was still above the world price. The impasse left most small holder cotton unsold.

Evidence of transmission of the crisis through other channels is mixed as data remains weak.  The IMF estimated that remittances to Malawi declined by more than 50% in 2009, to USD 61 million from USD 144.2 million in 2008. The crisis also appears to have affected private transfers to non-government organisations (NGOs). The Council for NGOs in Malawi (CONGOMA) estimated that donor support to NGOs declined by 5% in 2009. Foreign direct investments (FDI) in 2009 were lower at USD 110 million compared to USD 215 million in 2008 but remained within the medium term trend. The decline reflected completion of the new uranium mine.  Budget support donors maintained their commitments but with some serious disbursements delays in 2009 due to macroeconomic and fiscal policy concerns.

Malawi’s chronically low and volatile foreign reserves were particularly severe in 2009. They averaged 0.6 months of import cover. A USD 80 million disbursement from the IMF’s Global Crisis Special Drawing Rights (SDRs) in September 2009, only boosted reserves temporarily. Low reserves made it difficult for the RBM to provide sufficient foreign exchange to clear the market at the official exchange rate. The result was an increase in import payment backlogs from USD 47 million at the end of 2008 to USD 78 million at end March 2009. The fuel crisis that hit the country towards the last quarter of 2009 was largely caused by foreign exchange shortages.

Going forward, growth is projected to slow down but will remain relatively strong at 6% and 6.2% for 2010 and 2011 respectively. Slow growth in agriculture, wholesale and retail, utilities and manufacturing sectors will counter a strong rebound from the mining and financial sectors. Agriculture is expected to fall in 2010, down from 10.4% in 2009. Agricultural output is projected to fall due to local dry spells and farmers reducing production in response to low producer prices for tobacco[2] and cotton.  Estimates show that agricultural output in the 2009/10 season will fall by 18% to 30%, as a result of dry spells. Output is likely to fall further as government scales down the fertiliser subsidy from 180 000 metric tons in 2008/09 to 160 000 metric tons in 2009/10 and withdraws subsidies for tobacco, tea and coffee.

Manufacturing is projected to fall further with most firms expected to scale down operations as foreign exchange shortages and power outages persist in 2010. At an average of 1.4 months of imports, foreign reserves in 2010 will remain below the government of Malawi’s target of three months. Currently, Electricity Supply Corporation of Malawi (ESCOM) can only make available 265 MW against an estimated demand of 295 MW. Demand is growing rapidly and is projected to reach 325 MW in 2010. ESCOM’s ongoing rehabilitation works scheduled for completion in 2014 will not be enough to meet the demand, highlighting an urgent need for new sources of power. The authorities will need to make quick progress on the Lower Fufu project and expedite negotiations with the Mozambican government to ensure that the World Bank-funded Malawi-Mozambique inter connector project takes off without further delays. It is estimated that the 220 kV interconnector will have a maximum operating capacity of approximately 300 MW and the Lower Fufu Project will have between 70 and 145 MW[3].

At 53.5%, growth in the mining sector is expected to be strong as the Kayerekera uranium mine becomes fully operational in 2010. Uranium production in 2010 is projected at eight times the 2009 levels. The authorities are also hopeful that the niobium mining project at Kanyika will materialise in 2012 as scheduled. Annual niobium output is forecast at 3 times the scale of annual uranium output.

Largely dependent on the agriculture sector, the services sector is increasingly becoming important, accounting for over 40% share of GDP. Expansion in financial services and wholesale and retail trade will continue driving growth in the services sector. Different legislation related to banking, microfinance, insurance and the credit reference bureau were passed in November 2009 aimed at modernising the financial sector. Expected improvements in agricultural prices in 2010 as output declines should increase farmers’ incomes and contribute to growth in wholesale and retail trade.

Private consumption continues to drive real GDP growth with an estimated 13.4% contribution in 2009. At current prices, the share of private investment to GDP increased from 3.5% in 2001 to 15.5% in 2008. However, private investment contracted in 2009 with its contribution to GDP growth estimated at -0.3%. Some major investments in 2009 were in cotton processing by Malawi Cotton Company (USD 25 million), wood processing by Raiply EPZ Limited (USD 10 million) and mining by Jindal Minerals Limited (USD 15 million). Power availability continues to slow down investments. A USD 25 million investment in a sugar plant in Nkhata Bay district is failing to take off as ESCOM struggles to guarantee power availability. Real export growth declined in 2009 but is expected to rebound in 2010 as uranium exports increase.

Medium term prospects look weaker but still positive reflecting a gradual recovery after a setback in growth in 2009. The growing importance of the mining sector and the expanding service sector will be key as agricultural growth moderates. Lower global fuel and fertiliser prices should anchor improvements in terms of trade. Growth projections are premised on the authorities remaining on an IMF-monitored programme approved in February 2010. Sustained commitment to macroeconomic reforms should ensure uninterrupted disbursements from budget support donors. Projections further assume government commitment to fiscal discipline, monetary restraint for low inflation and a credible exchange rate regime for greater availability of foreign exchange and improved foreign reserves.

Macroeconomic policy implementation weakened in 2009 as government went off track of an IMF-monitored economic programme.  Government did not pursue any specific policy to mitigate the impact of the global financial and economic crisis. The poor policy environment during the election year may have aggravated an otherwise mild impact of the crisis.

The country’s fiscal policy aims at reducing domestic debt and hence debt service costs to lower domestic interest payments and create fiscal space for increased pro-poor expenditure. Fiscal discipline was a challenge in 2009 as the authorities increased domestic borrowing and incurred substantial spending overruns on the fertiliser subsidy programme. Government set out to achieve a 0.1% of GDP net domestic debt repayment in the 2008/09 budget, but ended with a net domestic borrowing of 3.8% of GDP.   Further, the authorities procured 40% more fertilisers for the subsidy programme than the amount in the 2008/09 budget at an estimated cost of 2% of GDP. Government’s expansionary fiscal stance increased aggregate demand and put pressure on the already limited supply of foreign exchange. An extra budgetary procurement of a presidential jet at a cost of USD 22 million in the last quarter of 2009 creates further pressure on foreign reserves. According to the authorities the pressure should be minimal as the jet will be paid in installments over a number of years. Overall expenditure increased from 32.8% of GDP in 2008 to 35.2% in 2008/09.

The 2009/10 national budget proposes some fiscal consolidation after budget overruns in 2008/09. The budget has a planned fiscal deficit of 1.6% of GDP compared to the 5.4% deficit incurred in 2008/09. Government proposes to finance the deficit through concessionary foreign borrowing, reducing pressure on domestic debt. The planned 1.5% of GDP domestic debt repayment will need commitment and discipline. The fertiliser subsidy programme remains a source of risk as the authorities have struggled to maintain fiscal discipline. In 2008/09 it hit 6.2% of GDP, up from 3% in 2007/08. If the programme is to succeed as a safety net tool for addressing liquidity constraints for productive poor farmers, the government will need to improve its targeting mechanism and develop a system for graduating beneficiaries for sustainability. Greater involvement of the private sector in the subsidy should bring efficiency improvements.

Implementation of the Medium Term Expenditure Framework (MTEF) is weak due to capacity challenges in the areas of economic planning, revenue projections, agricultural production estimates and the unpredictability of donor resources. Budget expenditure is broadly in line with priorities of the Malawi Growth and Development Strategy (MGDS). The 2009/10 budget allocates 13% of the resources to agriculture, 12% to road infrastructure, 10% to health, 9% to education, 5% HIV/AIDS and nutrition and 2% to irrigation and water development. “Energy generation and supply”, one of government’s key priority areas, received less than 1% share, a worrying development in view of persistent power problems. Credit to the private sector rose to MWK 70 billion in September 2009, an 8% increase over the September 2008 level.

In the 2009/10 budget, aid accounted for 33% of the total financing. Grants as a proportion of GDP have been steadily declining as domestic revenue performance has strengthened overtime. As a share of GDP, grants are estimated at 11.4% in 2009/10, a slight decline from 11.7% in 2008. This decline from 2008/09 is attributed to budget support disbursement delays over macroeconomic and fiscal concerns. Direct budget support in fiscal year 2009/10 represents 25% of all grant inflows and 9% of the total budget. Predictability remains an issue as most budget support donors tie their support to government’s performance on the IMF-monitored programme. Government partially attributes domestic debt increases to unpredictability of budget support disbursements.

The government of Malawi’s key monetary policy objectives aim to achieve a single digit inflation, strong foreign reserves and increased credit to the private sector. Benefiting from moderate food and fuel prices, inflation has fallen, averaging 8.5% in 2009. Potential food scarcity presents an upward risk on inflation but it is expected to remain within the range of monetary policy objectives. In line with a low inflation rate the nominal central bank rate has been maintained at 15% since 2007.  The commercial bank base rate has also remained constant, averaging 19.5% during the period.  Nevertheless credit to the private sector has been increasing, rising by 28% in September 2009, from end 2008 levels.

From May 2006, the government of Malawi pursued a fixed pegged exchange rate policy, holding the nominal value of the Malawi Kwacha steady at MWK 141:1 USD up to October 2009. The authorities used the exchange rate as an anchor to stabilise the price of imports. The strong kwacha however meant that imports became implicitly cheap while the real kwacha price of tobacco stagnated.  A fixed peg against the US dollar resulted in a sharp appreciation of the real and nominal effective exchange rate on the back of the strengthening of the US dollar in the first half of the year. This meant other currencies such as the British Pound (GBP) and the Euro (EUR) weakened against the dollar, leading to an implicit appreciation of the MWK. This reduced the value of some budget support commitments in MWK terms[1]. The widening foreign exchange rate spreads between the official and parallel markets suggested some overvaluation of the MWK.

The government introduced and intensified strict administrative measures to stabilise the exchange rate. Commercial banks were required to transfer 20% of their tobacco foreign currency receipts to the Reserve Bank, foreign exchange bureaus not meeting regulatory requirements were closed, and unauthorised foreign exchange dealers were prosecuted. The ruling exchange rate regime amplified Malawi’s exposure to real shocks causing foreign exchange shortages. The already low reserves made it difficult for the Reserve Bank to provide sufficient foreign exchange to clear the market at the official exchange rate, resulting in import payment backlogs – from USD 47 million at end 2008 to USD 78 million by the end of March 2009.  As the crisis deepened, the Reserve Bank gave import priority to fuel, fertiliser and food, which may have affected the importation of essential raw materials for the industry.

The government of Malawi has moved to address the problem of foreign exchange shortages and low reserves by adopting a more flexible exchange rate. In October 2009, they introduced a flexible exchange rate for the MWK against the USD with the objective of creating a better balance between supply and demand of foreign exchange. A surrender requirement of 20% of foreign exports receipts to the RBM has been removed. A more credible exchange rate policy is key to strengthening foreign reserves and facilitating export diversification. The authorities will need a pragmatic approach to determine an appropriate exchange rate that takes into account lessons from the 2009 foreign exchange crisis.

A weakening balance of payments characterised the external sector. Exports declined from 23.5% of GDP in 2008 to 22.8% in 2009, largely explained by poor tobacco prices. The average tobacco price at USD 1.87 per kilogram was 22% lower than in 2008 although higher than the five year average. The higher than average price suggests that tobacco may have been reasonably resilient to the economic slowdown. However, government intervention in the agricultural markets makes it difficult to determine the exact impact. Overall, a strong tobacco harvest and the start of the uranium exports helped sustain growth in exports. Tobacco production increased by 19% from 2008 to reach 232 million kilograms in 2009. Export performance of other key crops was mixed. Sugar exports remained strong increasing by 15% while tea exports declined by 4%. Uranium exports in 2009 were estimated at USD 24 million.

Benefiting from a strong kwacha, import growth at 5.04% outpaced the growth in exports. Extension of high-priced fertiliser contracts and extra budgetary imports contributed to the high import bill. Nevertheless, the trade balance has continued to improve from -10.1% of GDP in 2008 to - 8.8% in 2009. Largely targeting agriculture and mining sectors, FDIs fell from USD 215 million in 2008 to USD 110 million in 2009. Consequently, the current account deficit has expanded from -6.8% of GDP in 2008 to -8.1%.

The medium term outlook looks positive as uranium exports become more robust from 2010 and fertiliser and fuel prices remain subdued. Exports from uranium are expected to reach 2.9% of GDP in 2010 and 3% in 2011, up from 0.4% in 2009. As main trading partners such as the European Union (EU) and Republic of South Africa slowly move out of recession, prospects for external sector improvements look stronger. A strong rebound in exports is foreseen for 2010 with export growth projected at 11.46%. Grants should increase in 2010 as the authorities implement sound macroeconomic management post-elections. These factors combine to reduce the projected current account balance from -8.1% of GDP in 2009 to -5.9% in 2010.

Malawi is taking part in regional negotiations aimed at establishing a customs union under the Southern African Development Community (SADC) and Common Market for Eastern and Southern Africa (COMESA). An African Development Bank (AfDB) funded regional investment project approved in 2009 will finance the establishment of a common border post between Zambia and Malawi in 2012. These initiatives may result in the reduction of some tariff and non-tariff barriers to trade.

The government of Malawi remains hesitant to sign up to the Economic Partnership Agreements (EPA) with the EU citing insignificant differences in benefits between the EPA and the Everything But Arms (EBA) agreement.  The EBA agreement – whose benefits the government currently enjoys – provides duty-free and quota-free access of exports from Least Developed Countries (LDCs) to the EU. Sugar, one of Malawi’s key exports, became eligible for free access to the EU in 2009. A review of Malawi’s performance under the US African Growth and Opportunity Act (AGOA) is underway to help government strategise on how to reinforce the benefits from the scheme.

Aid dependency continues with non-traditional donors becoming increasingly important. The authorities have signed an agreement with the Chinese government who will provide about USD 170 million mostly for infrastructure development from 2010. The agreement provides for the construction of a five-star hotel and international conference centre, a football stadium and a University of Science and Technology in Southern Malawi. China is the largest non-traditional donor providing both loans and grants. Other new donors providing loans include the Saudi Fund for Development, Abu Dhabi and India.

Malawi’s overall risk of debt distress remains moderate. The Net Present Value (NPV) of debt to GDP has marginally increased from 16.01% in 2008 to 17.72% in 2009. Net central government domestic debt has increased from 19% of GDP to an estimated 20.3% in 2009. In moving forward, government will need to adhere to the recently adopted borrowing guidelines as it contracts new debt to avoid falling back into the pre-HIPC debt trap.

The World Bank Doing Business 2010 report (DB) ranks Malawi at 132 out of 183 countries down from a rank of 131 in 2009. The pace of reform has been slow. The authorities have yet to approve the legal framework that will allow introduction of a single business permit and the establishment of the Malawi Investment and Trade Centre (MITC), a one-stop service centre to enhance the ease of doing business in Malawi. It takes 10 procedures and 39 days to open a business in Malawi. There has been no improvement since 2007.

Access to financial services is difficult. Up to 86% of Malawi’s adult population is unbanked. Malawi’s rank on getting credit in the DB Surveys has declined to 87 in 2010 from 79 in 2008. Land tenure traditions continue to complicate both property rights and the use of land as collateral. The authorities are keen to modernise the financial sector. A financial sector development strategy is in the final stages of development. In November 2009, the government passed legislation in a number of areas – microfinance, banking, credit reference bureaus and insurance – aimed at improving service delivery and increasing its scope.

The foreign exchange policy pursued up to 2009 made access and availability of foreign exchange difficult for the private sector. The foreign exchange shortage and the resultant import backlogs increased the cost of production for firms and made the country more risky for foreign private lenders and suppliers. The 2009 foreign exchange crisis demonstrated that shortages also limit private sector capacity to diversify as the Reserve Bank is forced to prioritise key imports. 

 The challenges faced in the tobacco and cotton markets in 2009 call for a broader review of Malawi’s governmental policy on agricultural pricing. While there is in certain cases a genuine need for government intervention to correct market irregularities and protect the poor, this should be done within a clear framework that takes into account global market developments so as not to undermine private sector confidence.

The authorities will need to make quick progress to ensure provision of uninterrupted and adequate availability of power for private sector development. Current electricity shortages and intermittent supply is affecting firm productivity and new investments. According to one study, Malawi has the worst reliability of 24 countries surveyed in the Sub-Saharan region, with 63 days of power outages in the most recent year for which data is available.[1] Poor power generation and supply is further aggravating forex shortages through increased importation of diesel to run stand-by electricity generators and accelerating environmental degradation as households resort to biomass energy.

The availability of skilled labour remains a challenge. In the private sector, specific skills in engineering and sciences are scarce and the quality of Technical, Entrepreneurial and Vocational Education and Training (TEVET) is a constraint to business performance[2]. At 51 per 100 000 inhabitants the enrollment for higher education is much lower than the SADC average of 518[3]. Access to tertiary education is constrained by limited learning space, dependence on government subsidy and the lack of educational facilities. The authorities need to broaden access to tertiary education through improved infrastructure, governance and availability of educational facilities. The new private universities coming on stream should help expand access as government will now be able to enforce quality through the National Council for Higher Education (NCHE) that is to be established.

Parastatals remain a source of quasi-fiscal risk for the authorities. The privatisation of some parastatals – including the Agricultural Development and Marketing Corporation (ADMARC), ESCOM and the Water Boards – has stalled as discussions on their social welfare role continue. The authorities have started restructuring some key parastatals to reduce quasi-fiscal risks.  The increase in utility rates that they have announced will continue at least until they reach operating cost recovery levels. However, for sustainable risk reduction, the authorities will need a broader strategy to address fiscal challenges posed by such loss-making parastatals as Air Malawi and ADMARC. Recognising the importance of public private partnerships in moving forward the privatisation agenda and improving efficiency of public enterprises, the authorities are transforming the Privatisation Commission into a Public Private Partnership (PPP) Unit.

In line with their commitment to improve service delivery while addressing fiscal and monetary challenges, the authorities have started strengthening the implementation framework for the Public Finance Management (PFM) Action Plan. A Sector Wide Approach (SWAp) on PFM is under preparation to help refocus attention on priority policy reforms in the action plan. Measures to strengthen monitoring and reporting on budget performance are also being established to help complement these efforts.

The Malawi Growth and Development Strategy (MGDS) 2006-11 has been revised to include strategies for addressing key emerging challenges. The priority areas have increased from six to nine and now include i) education science and technology, ii) climate change, natural resources and environment management and iii) youth development and empowerment. The authorities are planning to start preparing the successor to the MGDS towards the end of 2010. Infrastructure development is one of the five themes of the MGDS with transport infrastructure as a priority area of focus. The National Roads Authority coordinates the road sector programme. At 12% of the budget, transport and roads received the largest share of the 2009/10 budget. Public investment fell from 9% of GDP in 2008 to 7.3% in 2009 as government shifted spending to the recurrent expenditures for 2009 general elections.

In an effort to reduce the cost of transport to the sea port in Mozambique, the government plans to undertake a pre-feasibility study of the long awaited Shire-Zambezi Water Way Programme and has approached the African Development Bank (AfDB) for support. The Malawi Telecom Ltd also report positive progress on the double ring fiber optic cable project which aims at linking the major cities in Malawi.

Progress on land reform has stalled. Government adopted a new land policy in 2003 aimed at ensuring security of tenure. The legal form would provide 50 years of renewable leases for all land tenure types with government having full custody of the land. A draft land law developed from the policy is yet to be debated in parliament. At 139 per square kilometer in 2008, population density is high, creating pressure on land ownership. It is estimated that 58% of the farmers cultivate less than 1 hectare.

Tax revenue mobilisation has been strong, averaging 17% of GDP over the past five years. The establishment of the semi-autonomous Malawi Revenue Authority (MRA) in 1998 has helped to expand the tax base and improve compliance. In 2009 2 516 new tax payers were registered. At MWK 75.36 billion, the total tax revenue in the 2008/09 tax year represented a 32% increase over the 2007/08 level. Coordinated by the Revenue Division of the Ministry of Finance, non tax revenues have declined from 14% of GDP in 2005/06 to 12% in 2007/08. The Ministry observes that poor implementation of the Appropriation in Aid Act[1], leakages and under pricing of government services explain the poor performance. As a proportion of total revenues, tax revenues have increased from 53% in 2005/06 to 60% in 2007/08 while non tax revenues have declined from 47% to 40 during the same period.

The MRA Act is the overall legal framework for revenue collection in Malawi. The Taxation Act provides for collection of income tax which includes Pay As You Earn (PAYE) and related fringe benefits. The VAT Act and the Customs and Excise Act provide the legal framework for the collection of VAT and various trade taxes respectively. Work to review the Tax Code of 1971 is under way with 2010 as a target date for approval. Malawi has registered positive reforms in paying taxes, improving its rank on the World Bank Doing Business 2010 report from 60 in 2009 to 24 in 2010.

Indirect taxes contribute the most to total government tax revenues. In the 2008/09 tax year, 47% of the total tax revenue came from indirect taxes with direct taxes and import duties contributing 37% and 11% respectively. Tax registration is voluntary but MRA conducts enforcement visits. Collaboration between the MRA and the Registrar General ensures recording of new tax payers at the time of business establishment. In 2009 MRA had 19 483 active small and medium taxpayers. The Large Taxpayers Unit (LTU)[2] has about 350 tax payers and accounts for 75% of domestic tax revenue.

The VAT and corporate tax rates stand at 16.5% and 30% respectively. Tax rates for individuals are on a graduated basis, the first MWK 120 000 being taxed at 0%, the next MWK 36 000 at 15% and anything above that, at 30%.  There is a 10% withholding tax on dividends as well as a 15% income tax on non-residents who were originally from Malawi.  The law provides for various degrees of tax exemptions to the presidency, government ministers, parliamentarians, members of the diplomatic corps and donor-funded programmes.

The authorities use different tax incentives such as industrial rebates, investment allowances for manufacturers, capital allowances and tax holidays to enhance investment and production. The government in the 2009/10 budget announced removal of import duties on generators to support the manufacturing and service sectors. An increase in duty to 25% – up from 10% – on milk, coffee, tea and nuts is aimed at protecting the development of agribusinesses.

The government is undertaking a number of policy reforms to enhance tax revenue mobilisation. It established MRA in 1998 to improve the efficiency and effectiveness of tax revenue mobilisation. In 2006 the authorities removed the Minister of Finance’s discretionary powers to waive duty – considered non-transparent and prone to abuse. The authorities further abolished the cumbersome and costly pre-shipment inspection, and replaced it with the post-clearance auditing function in 2009. Latest reforms include extending VAT in 2004 to manufacturing, wholesale and retail to expand the tax base, and introducing a tax clearance certificate for the medical and legal practitioners to renew their practising licences.  Non-tax revenues will be paid through banks to avoid leakages.

The PAYE threshold has been increased in 2009 by over 200% to MWK 120 000 per year to provide relief to more low wage earners. VAT has been reduced from 17% to 16.5% and the registration threshold increased from MWK 2 million to MWK 6 million. A 2% presumptive turnover tax for micro and small enterprises with an annual turnover of less than MWK 6 million has also been introduced to strengthen compliance. Legislation has been passed to allow for on-line self-assessment of tax liability and payment through banks.  The government has further introduced a provisional tax on capital gains on property transfer and a tax clearance certificate to change property ownership. 

The taxation of multinationals, particularly in the growing mining sector, remains a challenge as MRA has limited capacity to undertake transfer pricing, e-commerce and double taxation legal agreements. The maximum customs duty rate remains at 25%. This faces possible reduction as regional customs union takes place under the Southern African Development Community and the Common Market for Eastern and Southern Africa Market (COMESA).

The institutional framework for tax revenue mobilisation is clear. The MRA as a semi-autonomous agency has an independent board. The Ministry of Finance is represented on the board by the Secretary to the Treasury. The creation of a Large Taxpayers Unit (LTU), the introduction of an on-line self-assessment system for tax payers in 2009, and the merger of the Value Added Tax (VAT) and the Income Tax divisions into the Domestic Tax Division should help to reduce the cost of compliance. Government plans are underway to establish “one-stop shops” with Zambia and Mozambique for customs clearance. Management of some public service expenditures have been decentralised to local assemblies. Plans are underway to decentralise some elements of domestic revenue administration.

The MRA retains 2.5% of total receipts deposited at the Reserve Bank for its operations and 0.5% for its capital requirements. MRA may retain up to 3.4% of the total receipts if it performs better than projections. While this incentive may reinforce performance it may also create motivation for underestimating projections. MRA has often exceeded performance targets in the past decade. However, 63% of MRA’s operational costs are personnel-related, displaying a characteristic of many public sector departments and showing possible inefficiencies in the system. The MRA has submitted only one audit report since its establishment. Regular auditing of the MRA will ensure transparency and accountability.

Strong performance notwithstanding, challenges remain to further increase revenue mobilisation. About 70% of Malawians are smallholder subsistence farmers whose annual earnings cannot easily be assessed, captured and taxed. The informal sector is large, estimated at about 70% of the urban labour force.[3] The majority of operators in the agriculture and informal sectors are self-employed. Operating mostly on cash-based transactions, taxpayer registration and compliance in the informal sector are problematic. MRA also observes that some formal sector entities operate in the informal sector through third parties to avoid tax. A regional study on the informal sector planned for this year will help estimate the size of the informal sector and identify innovative ways of taxation. The presumptive 2% turnover tax was designed to suit the needs of the smallholder farmers and informal sector. These challenges call for the development of a clear strategy aimed at reinforcing domestic revenue mobilisation.

In May 2009, Malawi held the fourth multiparty general elections to elect the president and members of Parliament.  Declared free and peaceful, the result gave President Bingu wa Mutharika and his Democratic Progressive Party (DPP) a second term of office. Women won 21% of the seats, increasing their representation by 50% from the 2004 to 2009 Parliament. Following the elections, President Mutharika replaced his core economic management team with new appointments for the office of the Minister of Finance, Reserve Bank Governor and Secretary to the Treasury.

With a working majority in parliament, government easily passed the 2009/10 national budget and a number of financial bills carried over from the politically tenuous 2004-09 Parliament.  In November 2009, the DPP-led government further passed some bills that raised concern among civil society groups, including the bill that gives the power to the president to decide when to hold the local elections and the bill that gives him the power to fire the Vice President.

Malawi is one of the Least Developed Countries in the world ranked 160 out of 182 countries in 2009 in the United Nations Human Development Index (HDI). Poverty remains one of the most important social challenges in Malawi. However, sustained economic growth and improved food security over the past five years have helped reduce poverty. In 2009, 40% of Malawians lived in poverty compared to 52% in 2005. Nevertheless the authorities report that the MDGs on achieving universal primary education, gender equality and women's empowerment and improving maternal health will be difficult to achieve.

At 12.1% in 2009, HIV/AIDS prevalence rate is high but has declined from 15.3% in 2005. The number of patients on Anti Retro Viral therapy (ARVs) stands at 270 000 in 2009. The 2009 reports of ARV shortages and the supply of expired ARVs emphasise the need for better procurement management to ensure patient safety. The government also acknowledges the need for intensifying civic education within the framework of the National Strategy on HIV/AIDS. Progress in health services delivery has seen maternal mortality falling from 984 per 100 000 in 2005 to 807 per 100 000 in 2008 and life expectancy at birth improving from 48 years in 2005 to 53.1 years in 2009.

The education sector faces many challenges. The quality of primary education is poor and the enrolment for higher education is low. At 51 per 100 000 inhabitants the enrolment for higher education was much lower than the SADC average of 518 in 2006.  Malawi is at the bottom of all the SACMEQ[1] countries in English reading and next to last in mathematics. The government has intensified teacher training programmes to reduce the pupil to qualified teacher ratio, which at 88:1 remains high. They have also embarked on a special campaign to use rewards and rigorous enforcement to keep teachers in rural areas where vacancy rates and turnover are high. Provision of adequate learning materials and availability of qualified teachers will help improve the quality of education. The private sector reports shortage of skilled labour as one of the key constraints to business development. The skills shortage appears to result from low access to higher education. A study by the AfDB in 2009 highlighted the need for the government of Malawi to develop a policy on higher education to help address the challenge of skilled labour availability.

The 2008 National Welfare Monitoring Survey (NWMS) reported a national unemployment rate of around 1% with the highest unemployment of 4% reported for the 15-24 age group. The low unemployment rate hides substantial underemployment in Malawi since 80% of the labour force comprises small holder subsistence farmers involved mainly in rain-fed seasonal farming activities. The NWMS also indicates that only 8% of the labour force is salaried suggesting an equally smaller formal labour market. Lack of regular labour force surveys makes it difficult to ascertain labour market data. The last known comprehensive labour force survey was conducted in 1982 and the authorities plan to conduct a new one in 2010.