8 February 2002

Malawi: Continued Structural Reforms Could Improve the Growth Prospects And Dynamism of Economy

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Geneva — Continued structural reforms, including further trade and investment liberalization, and the pursuit of the privatization programme, could improve the dynamism and growth prospects of Malawi's otherwise weak and vulnerable economy, according to a WTO Secretariat report on the trade policies and practices of Malawi.

The WTO Secretariat report, along with the policy statement by the Government of Malawi, will serve as a basis for the first Trade Policy Review (TPR) of Malawi by the Trade Policy Review Body of the WTO on 6 and 8 February 2002.

The report explains that Malawi's current economic difficulties, including fiscal uncertainties, if not improved, may weaken the Government's resolve for further trade liberalization. Trading partners can contribute to the reforms by ensuring stable, increased access to their markets, especially in agricultural products, where Malawi's prospects appear strongest. Enhancing and complying with its WTO commitments may help sustain Malawi's unilateral reforms.

The report points out that structural adjustment programmes since the mid 1980s substantially liberalized the Malawi economy, contributing to high economic growth (almost 9% in 1996) and to the reduction of inflation to single-digit rates (9% in 1997). However, in the late 1990s, policy slippages, especially expansionary fiscal policies, resulted in macroeconomic imbalances, which precipitated an economic and currency crisis. Growth slowed to under 2% in 2000.

Monetary policy, until recently, accommodated expansionary fiscal policies and fuelled inflation, which peaked at 45% in 1999. Real interest rates were maintained at a high level. The public sector "crowded out" private sector growth, which stagnated. Moreover, despite a more liberal regime and efforts to attract investment, including the formation of the Malawi Investment Promotion Agency and various tax and other financial incentives, foreign direct investment (FDI) inflows remain erratic and relatively low: inflows (concentrated in manufacturing, construction and distribution) have declined, from US$70 million in 1998 to US$51 million in 2000. Unfavourable climatic conditions, declining export prices for tobacco (the main cash crop), and institutional weaknesses have compounded the economic difficulties. Malawi's GDP per capita stood at US$200 in 1999, and its external debt of US$2.6 billion was equivalent to about 150% of GDP. Malawi is eligible for debt relief under the Enhanced Heavily-Indebted Poor Countries (HIPC) Initiative.

The authorities, according to the report, have recently moved to improve Malawi's stabilization policies. A Parastatal Enterprise Reform and Monitoring Unit is now in place to control financial operations of parastatals, and a Monetary Policy Committee monitors monetary issues. Monetary targets are set, and Government borrowings from the Reserve Bank are now limited to 20% of annual budgeted domestic revenue. Exchange rate reforms have been strengthened and the export surrender requirements on traditional commodities (e.g. tobacco) reduced from 60% to 40% with a view to improving the international competitiveness of Malawi's exports.

Despite liberalization, Malawi's trade in goods fell from 97% of GDP in 1994 to 74% in 1999, i.e. from 30% to 27% for exports and from 67% to 47% for imports. Malawi's trade is relatively concentrated, especially in commodities. Primary products, overwhelmingly tobacco, account for most exports. Minimal export diversification has occurred; non-traditional exports accounted for only 13% of exports in 1999. Most manufactured products, including fuels, machinery, transport equipment, chemicals, and other intermediate inputs, are imported. The share of developing countries in Malawi's trade has decreased. Over two thirds of exports are sold to developed countries. South Africa has been surpassed by Germany and the United States as Malawi's main export market (its share fell to 12% in 1999). Imports are increasingly being sourced from industrialized countries, which accounted for 42% of Malawi's imports in 1999. South Africa remains the main source of Malawi's imports although its share fell from 44% in 1995 to 32% in 1999. Zimbabwe's share also declined, to 10% in 1999, ranking it third behind the United Kingdom, whose share rose to 16% (up from 4% in 1995). Malawi's regional trade, including with other COMESA and SADC members, is relatively minor. Malawi is a net importer of services, especially in transport and insurance.

The tariff is Malawi's main trade policy instrument. Its simple average MFN tariff was almost 14% in 2000/01, down from almost 16% in 1997/98 and 21% in 1996/97. Virtually all tariffs are ad valorem. The tariff structure is escalatory, with six bands; rates of zero or 5% apply to "necessities" and of 10% to intermediate goods. The maximum duty rate applied to consumer goods is currently 25%. With a coefficient of variation of about 0.7, tariffs were moderately dispersed in 2000/01. Lower, more uniform duties would improve the tariff structure and economic efficiency.

In he context of the Uruguay Round, Malawi bound tariffs on all agricultural products at a ceiling rate of 125% (except for a few products with ceiling rates of 50%, 55%, and 65%), and on less than 1% of tariff lines for non-agricultural products, at ceiling rates ranging from 30% to 65%. Other duties and charges on these products are bound at a ceiling rate of 20%.

Malawi is heavily dependent on agriculture, especially tobacco. Agriculture accounted for 38% of GDP in 1999, and about 85% of employment. Following the Government's deregulatory policies, the main trade instrument affecting agriculture (ISIC definition) is the tariff; the average MFN rate on such products was 12.2% in 2000/01. Controls on the production and marketing by smallholders of traditional crops, including tobacco, have been removed. Manufacturing accounted for about 14% of GDP in 1999. The share of services in Malawi's GDP fell from 57% in 1994 to 47% in 1999. The existence of many state-owned services enterprises reflects the delays in liberalizing this sector.

The report notes that more efficient infrastructure services should raise the competitiveness of downstream activities and encourage foreign direct investment (FDI). And extending the coverage of tariff bindings beyond agriculture and narrowing the gap between bound and applied rates would benefit Malawi and its trading partners by increasing the predictability of the tariff.

Note to Editors

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. Significant developments which may have an impact on the global trading system are also monitored. For each review, two documents are prepared: a policy statement by the government of the member under review, and a detailed report written independently by the WTO Secretariat. These two documents are then discussed by the WTO's full membership in the Trade Policy Review Body (TPRB). These documents and the proceedings of the TPRB's meetings are published shortly afterwards. Since 1995, when the WTO came into force, services and trade-related aspects of intellectual property rights have also been covered.

For this review, the WTO's Secretariat report, together with a policy statement prepared by the Government of Malawi, will be discussed by the Trade Policy Review Body on 6 and 8 February 2002. The Secretariat report covers the development of all aspects of Malawi trade policies since the previous review, including domestic laws and regulations, the institutional framework, trade policies by measure, and developments in selected sectors.

Attached to this press release are the Summary Observations of the Secretariat report and parts of the government policy statement. The Secretariat and the government reports are available under the country name in the full list of trade policy reviews at http://www.wto.org/english/tratop_e/tpr_e/tp_rep_e.htm. These two documents and the minutes of the TPRB's discussion and the Chairman's summing up, will be published in hardback in due course and will be available from the Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992 and 1999), Australia (1989, 1994 and 1998), Austria (1992), Bahrain (2000) Bangladesh (1992 and 2000), Benin (1997), Bolivia (1993 and 1999), Botswana (1998), Brazil (1992, 1996 and 2000), Brunei Darussalam (2001), Burkina Faso (1998), Cameroon (1995 and 2001), Canada (1990, 1992, 1994, 1996, 1998 and 2000), Chile (1991 and 1997), Colombia (1990 and 1996), Costa Rica (1995 and 2001), Côte d'Ivoire (1995), Cyprus (1997), the Czech Republic (1996 and 2001), the Dominican Republic (1996), Egypt (1992 and 1999), El Salvador (1996), the European Communities (1991, 1993, 1995, 1997 and 2000), Fiji (1997), Finland (1992), Gabon (2001), Ghana (1992 and 2001), Guatemala (2002), Guinea (1999), Hong Kong (1990, 1994 and 1998), Hungary (1991 and 1998), Iceland (1994 and 2000), India (1993 and 1998), Indonesia (1991, 1994 and 1998), Israel (1994 and 1999), Jamaica (1998), Japan (1990, 1992, 1995,1998 and 2000), Kenya (1993 and 2000), Korea, Rep.

of (1992, 1996 and 2001), Lesotho (1998), Macao (1994 and 2001), Madagascar (2001), Malaysia (1993, 1997 and 2001), Malawi (2002), Mali (1998), Mauritius (1995 and 2001), Mexico (1993 and 1997), Morocco (1989 and 1996), Mozambique (2001), New Zealand (1990 and 1996), Namibia (1998), Nicaragua (1999), Nigeria (1991 and 1998), Norway (1991, 1996 and 2000), OECS (2001), Pakistan (1995 and 2002), Papua New Guinea (1999), Paraguay (1997), Peru (1994 and 2000), the Philippines (1993 and 1999), Poland (1993 and 2000), Romania (1992 and 1999), Senegal (1994), Singapore (1992, 1996 and 2000), Slovak Republic (1995 and 2001), the Solomon Islands (1998), South Africa (1993 and 1998), Sri Lanka (1995), Swaziland (1998), Sweden (1990 and 1994), Switzerland (1991, 1996 and 2000 (jointly with Liechtenstein)), Tanzania (2000), Thailand (1991, 1995 and 1999), Togo (1999), Trinidad and Tobago (1998), Tunisia (1994), Turkey (1994 and 1998), the United States (1989, 1992, 1994, 1996, 1999 and 2001), Uganda (1995 and 2001), Uruguay (1992 and 1998), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).

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