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Thinking Development

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By Christopher Guta, PhD:

Minister of Finance, Economic Planning and Development Honourable Joseph Mwanamvekha, MP, bemoaned the volatility of economic growth in Malawi in his budget statement delivered in Parliament on September 9 2019. Growth volatility has both economic and non-economic sources. One source in the economic category to which Malawi is exposed is debt crises. They arise from large government cash deficits and/or poor monetary policies. Examples in the non-economic category range from hurricanes such as the hurricane Dorian which has brought Bahamas to its knees recently, to earthquakes, volcanos, fires, pests and, as the Finance minister said, droughts and floods. Droughts burn our crops while floods wash them away. Our agriculture-driven economy often nosedives arising from these calamities.

I promised last week to address the issue of volatility of our economic growth from a different perspective that is related to our manufacturing sector which I think did not receive much attention in the budget. I am using manufacturing as a proxy for the industrial sector as opposed to the agriculture and service sectors.

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The manufacturing sector has, since independence, not been an area of focus in Malawi. I will back this position using one statistic: annual shares of development expenditure. Prior to independence (1957-1963), industry enjoyed an average of 14 percent share of development expenditure while average shares for agriculture and services were at 25 and 47 percent respectively. These percentages do not add to 100 as there were other areas of expenditure not falling in the sectors.

In the period 1968 – 1983, the average shares of development expenditure on industry and agriculture went down to six percent and 23 percent with services emerging the winner as its share increased to 53 percent. I have not taken time to bring out latest data on these shares but my suspicion is that the biases against industry have remained. I defend this presumption using continuing low performance of industry regarding contribution to GDP. In 2004, industry’s share in GDP was 15.5 percent compared with 30.8 percent and 45.6 percent for agriculture and services respectively. The corresponding ratios in 2017 were industry – 14 percent, agriculture – 28.3 percent and services – 57.7 percent. Thus, while the shares of both industry and agriculture declined, that of services increased in 2017 relative to 2004. Usually, one reaps where he/she has sown!

The resilience of an economy is aided by the diversity of its production capacity. Over the years, especially since Malawi liberalised trade, a significant number of companies have disappeared from the landscape, especially those engaged in manufacturing operations away from agriculture. Remember PEW, Nzeru Radio or Press Fashions? This indicates that progressively the companies became financially unhealthy and eventually became bankrupt.

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The health of a company is, from a financial management perspective, measured by a number of indicators that are closely related to its cash flows. One indicator is debt to equity ratio with financial institutions such as banks providing debt and owners of the company contributing equity.

Liberalisation of trade in Malawi was accompanied by deteriorating terms of trade. Put simply, this means that we needed to export more goods to obtain the same value in financial terms. This phenomenon exerted significant pressure in the cash flows of businesses, especially when interest rates were also prohibitive. Thus, businesses could not make important investment decisions to, for example, upgrade processing technology in order to remain competitive. It was the credit squeeze to firms in a context of high interest rates that made many companies in the industrial manufacturing sector to disappear from the scene.

From my reading, the budget statement has not focused on domestic manufacturing of goods away from agriculture. It, therefore, continues to expose the economy to growth volatility. That said, I noted the efforts to promote exports of processed goods by both increasing the export allowance for processed ones and reducing the allowance for unprocessed exports. That is commendable. But this relates to mainly agricultural commodities. I also note that there was a reduction in tax for renewable energy products. The question I had was: Where are they manufactured? I am yet to find out if any of the products: solar panels, solar batteries all the way to liquefied petroleum gas and gas cylinders are locally produced. I think it would be prudent to establish strategies where local production is encouraged beyond the demand side tax incentives provided in the budget.

From my layperson’s perspective, I think that growth volatility in Malawi is, beyond droughts and floods, exacerbated by lack of diversity in our production capacity. The hard economic environment that persisted for a long time with corresponding negative impacts on cash flows of businesses, especially those in manufacturing, has had a role in influencing growth volatility. More deliberate actions to spur manufacturing are warranted. Otherwise, the sector will continue to decline, thereby exposing Malawi to greater growth volatility.

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