Producing for import substitution

Despite years of efforts to enhance import substitution, Malawi seems to be making no headway.

Demand for imported products continues to rise. Consequently, authorities revised Malawi’s foreign exchange monthly requirement upwards in 2021 by 20 percent from $209 million (K366 billion) to $250 million (K437 billion), signifying a prevailing excess demand for foreign currency amid low supply.

National Statistical Office (NSO) data shows that Malawi’s exports only cover one third of imports, with fuel, fertilisers and pharmaceuticals taking up to 40 percent of the import bill.

On the other hand, Malawi has relied much on tobacco, sugar and tea for almost 65 percent of its export earnings.

Where are we getting it wrong?

In an interview on the sidelines of the Malawi Confederation of Chambers of Commerce and Industry (MCCCI) 2024 Business Leaders’ Summit in Mangochi two weeks ago, Press Corporation Limited plc  chief executive officer Ronald Mangani said that Malawi’s deteriorating external imbalance is a production problem.

He presented a paper on re-orienting business for export production and while imports reflect a shortfall in production, Malawi’s key exports and imports are exchange rate inelastic, with the export basket having limited value addition and deteriorating terms of trade.

Mangani, an academic with a doctorate in economics, said: “It is not possible for the private sector to control the operating environment.

“Inspite of our inability to control our operating environment, what we put into what we become as a country is ours and nobody can take that away from us and, therefore, we need to be responsible.”

He said the country’s exports only cover one-third of imports.

Mangani said the country uses foreign aid such as debt and grants and unconventional means like currency swaps and commercial debt to pay for the other two-thirds of imports.

On the other hand, he said key imports, mostly strategic goods, are prioritised in allocation of official reserves, leaving the rest of the private sector to access residual reserves at premium or use own-generated foreign exchange.

Mangani said: “From where we stand, the private sector is located as the engine for growth, the economy is not growing, it means the private sector is not meeting the expectation of the economy  to be the engine for growth.

“Now the economy only affords to export up to one third of what is required to meet the import bill and that is sad. We need to save that and the responsibility of reversing it resides in the privates sector”

Can Malawi produce for import substitution?

On her part, Old Mutual (Malawi) plc group chief executive officer Edith Jiya says as amid the structural trade deficit, Malawi has continued to face persistent currency shortfalls, exports dampened by recurring weather shocks, imports exposed to price fluctuations due to geo-political shocks, putting upward pressure on inflation and downward pressure on economic growth.

She concedes that imports feed local production chains making production expensive.

However, Jiya said while the challenge creates scope to produce for import substitution, constraints must be resolved to mine the opportunities and close the structural gap.

She says: “We need to grow our manufacturing base to subsidise some of the basic  imports. The reason we are importing is because there is demand, the market locally can absorb that demand.

“But how do we capture that demand without the need to cross borders? It is a give and take.”

Jiya said that in Malawi, constraints to import substitution include limited domestic production capacity, dependence on imported inputs, infrastructure challenges, market competition and access to finance.

She said: “Potential to develop agri-value chain and key industries that can locally provide substitutes for imports

“Increased domestic production for import substitution will aid economic diversification and remedy economic challenges.”

Government’s aspiration

The Buy Malawi Strategy was launched in March 2016 to enhance competitiveness of local firms, stimulate local production, promote industrialisation and enhance import substitution.

In the short to medium-term, the strategy was expected to reduce the import bill and assist in narrowing Malawi’s trade deficit, to save foreign currency by directing it towards the procurement of more productive inputs such as equipment and machinery and vital raw materials.

However, the World Bank says the effectiveness of promoting import substitution to address foreign exchange shortages remains questionable as government’s sentiments are not matching policy actions.

In its 15th edition of Malawi Economic Monitor, the Bretton Woods institution cited the Buy Malawi Strategy, noting that the government further proposed supporting the strategy with increased regulation such as compelling retailers to provide at least 50 percent of shelf space to domestic items.

Reads the report in part: “While it remains to be seen whether enforcement follows rhetoric, government officials have recently promised to step up the enforcement of guidelines designed to promote import substitution.

“While such perspectives are reflected in select government documents and initiatives such as the National Export Strategy II which was launched in December 2021 as well as in Malawi’s participation in the African Continental Free Trade Area, there remains some ambiguity as to how determined Malawi is to commit to an export-led growth strategy.”

Government’s efforts to provide an enabling environment

Minister of Trade and Industry Sosten Gwengwe, while conceding challenges businesses are facing, said in an interview that his ministry is putting emphasis on supporting the manufacturing and export sectors of the economy.  

He said the ministry is also continuing with the reforms aimed at streamlining and innovating business processes to efficiently deliver services.

Said Gwengwe: “Government is committed to changing the trajectory and grow this economy which has performed decimally for the past three decades.

“We should add value and produce enough for local consumption, thereby import substituting and excess for the export market to generate the much needed foreign currency. This is the only sure and sustainable way of growing our economy. “

Malawi is  predominantly importing economy, with imports surpassing exports, creating a wide trade deficit.

Data shows that Malawi imports goods valued at $3 billion (about K5.2 trillion) every year against exports valued at $1 billion (about K1.7 trillion).