Why is the services sector failing the economy?

Despite its enormous contribution to the country’s gross domestic product (GDP), at 52.4 percent, the services sector still strives to sprout.

From slow pace of economic growth, low incomes to inadequate and unreliable power supply and corruption, little breathing space is left to exploit the sector’s potential.

As Chancellor College-based economist Ronald Mangani points out in his situational analysis on the services sector and trade in Malawi, the country’s competitiveness is low.

He notes that the implementation of well-formulated national policies is characteristically below board, and the government is quite slow when it comes to domesticating trade agreements, such that most of the relevant legislation is still aged.

To add to that, Mangani says most services are ‘overly liberal’, but an unfriendly tax regime, high cost of capital, limited incentives, political interference and foreign exchange shortages affect investment planning given that the capital account is not yet liberalised.

He says: “Government strategies should capitalise on the limited strengths and exploit the enormous opportunities that exist, while addressing the weaknesses and strategising against the threats to the extent possible.

“Unless the country puts due emphasis on production and exportation of goods and services, it will not be able to benefit substantially from the trade agreements that it is participating in.”

Figures from Ministry of Trade show that between 1961 and 2018, the country’s economic growth has averaged 4.3 percent with most of Malawi’s GDP growth over recent years coming from the services sector.

The share of services in GDP rose from 38.3 percent to 52.4 percent during the 1960 to 2017 period, due to an increase in the distribution of primarily imported products from South Africa, China, India and a few other trading partners.

However, most of the services output involves very little value-addition and job-creation.

As a consequence, the services employment only grew from 14.6 percent in 1991 to 19.9 percent in 2019.

Over the years, the value of Malawi’s exports of goods and services has risen from $327.1 million (K242.2 billion) in 1980 to $1.2 billion (K888 billion) in 2018.

Of this, merchandise exports have grown from $295.3 million (K218.5 billion) to $1.1 billion (K814 billion), while services exports have risen from $31.8 million (23.5 billion) to $157.5 million (K116.5 billion).

Travel and transport services dominated these exports for most of the period up to 2010, accounting for an average annual share of 45.1 percent and 41.3 percent, respectively.

Communication and related services contributed 13.1 percent, while financial and insurance service exports were insignificant.

On the other hand, the value of Malawi’s imports of goods and services rose from $617.5 million (K457 billion) in 1980 to $3.2 billion (K2.4 trillion) in 2018.

Over the years, merchandise imports have grown from $439 million (K324.9 billion) to $2.8 billion (K2.1 trillion), while services imports have risen from $178.6 million (K132 billion) to $360.1 million (K266.5 billion).

The key services imported by Malawi are dominated by transport services, averaging 54 percent of total imported services per annum.

As a consequence, the balance on Malawi’s services trade account has been persistently negative, with a deficit averaging $150.2 million (K111.5 billion) annually between 1980 and 2018.

Against this background, the Malawi Government has formulated the National Services Export Strategy (Nses) (2021-2026) to promote services exports in order to reverse the deteriorating trend, and to ensure that services contribute significantly to the generation of foreign exchange, employment, incomes and poverty reduction in Malawi.

This is motivated by the global trends, where services are playing an increasingly important role in both developed and developing economies.

This comes on the back of other strategies such as National Export Strategy (NES), Malawi Growth and Development Strategy (MGDS) and Buy Malawi Strategy to ensure import substitution.

The draft National Serives Export Strategy, which Business News has seen confirms that Malawi’s services sector is characterised by more internal weaknesses than there are strengths.

The strategy points out the dominance of wholesaling and retailing of imports, significant skills gaps (especially middle technical skills), significant data gaps and the fact that available data tends to be unreliable, low investment in research and innovation, as well as low value-addition by the sector’s activities.

Reads the strategy in part: “In addition, sector-specific weaknesses are also discernible, such as technological gaps, unprofitable social responsibilities that strangle financial sustainability of State-owned enterprises, low remuneration that fans unethical behaviours, regulated tariffs set too low to motivate investment and generally high operating costs relative to foreign competition…

“These weaknesses directly thwart the regional competitiveness of Malawi’s services.”

Ministry of Trade director of trade Clement Kumbemba observes that while merchandise trade has received much attention than trade in services in the past centuries, services trade is the new frontier for economic development.

He says services trade is the fastest growing form of domestic and international trade relative to merchandise trade in the global economy, and has potential to increase Malawi’s domestic and export performance.

Says Kumbemba: “Services today, account for almost 60 percent of world trade and generate more than two-thirds of global GDP and almost two-thirds of global foreign direct investment. It contributes significantly to job creation.

“According to the International Labour Organisation, services add about three percent to the job market each year. This is a greater share than either manufacturing or agriculture sectors which are more traditionally associated with trade. In other words, trade in services has become an epic of our economic activities.”