CHAPTER X DISCUSSION
10.4 MALAWI'S INVESTMENT CLIMATE
repercussions for the economy as a whole. In the same vein, the downturn in FDI flows in 2000 was also attributed to macroeconomic instability, unstable exchange rates, and high inflation rates, which deterred potential investors from entering the country.
The above findings support the theoretical proposition that, given all the factors that can impinge on investors' decisions, it is difficult at best to isolate the effects of just one factor, such as incentives, on the level of FDI inflows to Malawi, and the country's growth rate. However, it can be said that the current investment incentives available to foreign investors are not sufficiently attractive to make international investors select Malawi as a place for doing business.
programme with the IMF or World Bank as a sign of stability and intent to reform, they do not rank this as an important factor in investment decisions.
Results from the survey reveal that Malawi's poor macroeconomic conditions are the largest constraint to private sector investment and trade. High real interest rates, relatively high inflation, unpredictable exchange rates, and weak domestic demand, have had an adverse impact on the business community, and have directly deterred trade and investment.
High real interest rates: With commercial Kwacha borrowing rates at over 45% and real interest rates in excess of 30%, there are few business opportunities that can yield sufficient returns at these rates of interest. Effectively, the vast majority of businesses are unable to access finance for investment. There are some foreign firms that can borrow in hard currency, but this carries an additional cost especially as the risk premium for Malawi is relatively high, and such loans are susceptible to devaluation effects. The underlying problem is that much of the country's domestic resources are being absorbed by external debt payments. As of December 2002, the cost of servicing this debt now accounts for 24.7% of government expenditure and 4.5% of GDP.
High inflation: High inflation rates are a problem for businesses as they make pricing decisions more difficult and uncertain, due to fluctuating costs. The recent slowdown in inflation towards single figures is promising, though it has been a consequence of weak economic activity and high interest rates. The volatility of inflation rates is a major disincentive to investment as it makes returns more uncertain for foreign investors.
Exchange rate instability: Fluctuations in the exchange rate makes costing and pricing decisions more difficult and uncertain, because costs are unpredictable and constantly moving. Companies dependent on imports are severely affected as devaluations feed directly and rapidly into business costs. This is offset to some extent by export-oriented companies, but not wholly, and not at all for non-exporting businesses.
Weak domestic demand: Economic theory cites national market size as an important traditional determinant of the location of FDI. With 85% of Malawi's population living in rural areas mostly on subsistence incomes, and limited growth in urban incomes, the domestic market is small and not contributing to growth for consumer-related goods and services. The overall negative growth rates of the last two fiscal years has resulted in shrinking average real incomes, thus further reducing opportunities for trade and investment. Malawi's weak domestic demand and small domestic market acts as a disincentive to potential investors.
Weaknesses in the legal and regulatory environment represent a constraint to investment and trade in Malawi. There are still cumbersome procedures when interacting with government and weak administration of these procedures, which leaves room for corruption. The survey results showed that corruption has a detrimental impact on businesses. According to the World Bank's Country Economic Memorandum (2003) high levels of corruption and lack of political will to combat corruption, are some of the main reasons for the slow economic growth in the country. Malawi has a reasonable institutional and legal infrastructure for addressing corruption through public education, prevention and enforcement. These institutions, however, suffer from lack of political support, low budgetary resources and a weak court system for effective prosecution of high profile cases.
With regards to investment, although MIPA serves to act as a "one stop shop window"
for investors in Malawi, the results indicate otherwise. Minimal authority is awarded to the Agency and, in the absence of an Incentives Act, there is no specific set of criteria to judge who qualifies for incentives, which sectors are eligible for incentives, what incentives are available for investors, and how these incentives will be awarded. With an incoming investment, MIPA must get clearance from numerous departments and ministries, and ultimately it is found that self-interests play an important part in what investments are encouraged and allowed into Malawi.
Malawi's infrastructure to support businesses is weak, particularly in relation to transport and utilities. The economy suffers from a poor transport infrastructure, high costs of transportation, and unreliable and expensive utilities. These weaknesses contribute to the high costs of doing business in Malawi, and is then passed on to other businesses and consumers.Italso impacts on Malawi's ability to export and compete internationally.
The above constraints which affect all businesses and which are resulting in low investment and growth in Malawi, need to be urgently addressed if Malawi is ever to become fully integrated into the global economy. There is overwhelming evidence which shows that the quality of the environment for investment in a country, is extremely important to investors. The survey results are consistent with Blomstrom (2001), who states that, rather than proposing narrowly defined FDI policies, attractive terms to investors should be seen as part of the country's overall industrial policy. IfMalawi is to see any increase in its FDI inflows, an overall strategy is essential to restore macroeconomic conditions that are conducive to growth, to strengthen the legal and regulatory framework for doing business in the country, and improve the infrastructure that supports the economy. Only when the fundamental determinants are attractive enough for investment to be profitable, will investment incentives have any significant effect.