Barely five months after second-hand vehicle importers threatened to take the Malawi Revenue Authority (MRA) to court over its decision to introduce a fixed duty on vehicles, the International Monetary Fund (IMF) seems to add salt to injury.
This is because the Bretton Woods institution has cited a raise in import taxes on vehicles and the updating of the fuel formula among four policy actions it says can help Malawi contain the growing demand for used motor vehicles, which it blames for driving the demand for fuel.
This is contained in its Malawi IMF Country Report No. 23/375 released Wednesday.
The report has been released after, on November 15, the IMF Executive Board meeting in Washington DC, the United States, approved a four-year Extended Credit Facility programme for Malawi.
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In the country report, IMF observes that Japanese second-hand car imports more than doubled from 2,948 cars in 2016 to 7,368 cars in 2022.
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It says there may have been both push and pull factors resulting in this rapid growth.
To address the problem, the fund has suggested four policy actions that may be considered such as closing Value Added Tax loopholes and ensuring that all residents pay the full tax on vehicle imports.
“[The others are] (ii) raising import taxes on vehicles to (at least) the regional average; (iii) updating the fuel price formula, including by applying a market-based exchange rate; and (iv) raising fuel taxes.”
It says Malawi is not generating enough through vehicle taxes.
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“Prices in Malawi are comparatively low, reflecting lower taxation levels. Like in much of the region, Malawi’s car supply is mainly sourced as secondhand imports from wealthier left-hand drive countries, primarily Japan, but also Australia, Singapore and Thailand. A few companies provide competitive services that allow African customers to select a vehicle online and have it shipped, imported and registered in their country,” it indicates.
The IMF adds that there may have been a shift in the export destination from elsewhere towards the African market, which became much more accessible via online sales and settlements via mobile phones.
“The high level of vehicle imports constitutes a drain of scarce foreign exchange earnings but also causes elevated demand for fuel (and political pressures for low and stable fuel prices).
“Mass motorisation and the resulting fuel demand constitute a macro-critical risk factor. Furthermore, the relative under-taxation of vehicles and fuel imply a sizeable loss of potential revenue,” the fund says.
It says booming fuel imports are a leading cause of Malawi’s balance of payment pressures and depletion of official foreign reserves.
It says economic fundamentals do not explain this boom but that it appears rather rooted in misaligned policies.
Malawi fuel consumption, according to the fund, has been rising and far exceeds the levels of peer countries.
“Fuel consumption per capita (27.9 litres per capita) also seems to be at the level consumed in much more industrialised countries (e.g., Vietnam) and seems to be much higher than that of neighbouring countries,” the report says.
Over the years, financing fuel imports is becoming increasingly difficult as Malawi’s external position has deteriorated, it adds.
According to the fund, international banks stopped confirming letters of credit (LC) since the end of 2022.
“Private sector fuel importers (mainly PIL) rely on LC from local banks, promising payment once an exporter ships fuel. Oil suppliers/exporters typically require that local banks’ LCs be confirmed by an international reputable bank. Most local banks cannot get LCs confirmed since the end of 2022 unless the full value of imports is deposited upfront.
“Supplier credit lines have been exhausted. PIL is enjoying an open credit line of $20 million (on a rolling, monthly basis) with one of Malawi’s main oil suppliers. The binding constraint, however, has been the availability of foreign exchange to service the credit line. PIL has not been able to purchase $20 million per month to service the credit line and the supplier requires upfront payment for all further supplies,” the fund says.
Finance Minister Simplex Chithyola Banda was not immediately available for a comment.
However, in their Memorandum of Economic and Financial Policies, Chithyola Banda and central bank governor Wilson Banda said the government is committed to delivering on the objectives and targets agreed to under the ECF supported programme.
When Gita Gopinath, who is the IMF First Deputy Managing Director and acting chairperson, visited Malawi this year and had discussions with President Lazarus Chakwera, she said Malawi had to make some tough choices to register economic gains.
About five months ago, when MRA announced new tax measures for second-hand vehicles, there was an uproar, with Car Dealers Association of Malawi threatening court action.
MRA later rescinded the decision.
