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Malawi's budget to end forex woes

Malawi's finance minister Ken Kandodo delivered the 2011/ 2012 budget speech last month, which aims at ending the forex shortage which has scared away investors and is threatening Malawi's economic growth. In the K307bn budget, Kandodo said government acknowledged the forex problems within the country.
He however, said this can be partly attributed to high rates of economic growth that Malawi has experienced in recent years.

"Part of this economic growth has translated in high demand for imports," said Kandodo before adding, "Unfortunately, our export base has remained narrow in that we continue to rely on the same traditional exports of tobacco, tea, sugar and recently cotton."

In aggregate, he said the export value has not kept pace with import demand. Malawi's exports represent 20% of the GDP at the moment while imports are the equivalent of 39% of GDP.

"In turn, this trade deficit has resulted in dwindling international foreign exchange reserves and foreign exchange shortages which have resulted in procurement challenges of strategic imports, especially fuel," he said.

Improving forex availability

The finance minister also said banks in Malawi are taking longer to settle foreign invoices and some importers cannot secure credit lines or establish letters of credit. He said government is not just sitting without putting up measures to help the country improve foreign exchange availability.

Government says it will enhance and introduce supply side measures that will unlock the export potential of Malawi and increase the supply of foreign exchange on the market.

"In the budget we have already included some K1.6 billion to be invested in the cotton industry in the farming season and we believe this will allow us to generate extra foreign exchange by the next season," he said.

As a way of promoting the export sector, government says it will also establish an export pre-finance and guarantee scheme to provide working capital and medium- to long-term loans to exporters. The scheme will focus on small-scale, non-traditional exporters who venture into processing and export of non-traditional commodities like gemstones or non-traditional agricultural products like pigeon peas, wheat, soya and paprika.

Introduction of reference pricing

The treasury gate-keeper also told the national assembly in his budget statement that government investigations have shown that for the goods that Malawi is currently exporting, the country is not getting the full value due to transfer pricing through over-valuation.

"To arrest this problem, the government will introduce reference pricing which will be used to value exports and validate declarations made on CD1 form as exports are discharged through our borders," he said.

Government is also working towards signing double taxation agreements with countries of final destination for Malawi's major exports.

"Through these double taxation agreements, MRA will be able to obtain price and volume information on Malawi's exports to those countries and will use that information to determine cases of transfer pricing," he said.

Since President Bingu wa Mutharika announced in his 2011 state of the nation address that it will have a zero-deficit budget, the ministry revealed several ways it intends to increase its revenue base.

The finance minister announced that government intends to encourage remittances from Malawians in the diaspora describing this as one untapped source of foreign exchange.

"Although these Malawians are allowed to operate foreign currency denominated accounts with banks of their choice in Malawi, they have tended to use informal channels," he said.

Using formal channels to remit funds

He said time has come for Malawi to come up with concrete incentives to encourage Malawians living abroad to use formal channels to remit funds to their families or for investment.

"Government is contemplating possibilities of promoting investment participation by the Malawian diaspora including schemes for easing red-tape in accessing real estate, like allocation of plots in urban centres for Malawians in the diaspora who operate FCDAs," explained Kandodo.

Government also announced that since businesses have from time to time requested for a waiver of the 60/40 retention/conversion rule in order for them to meet foreseen foreign obligations, the Reserve Bank of Malawi has granted such waivers on a case-by-case basis.

Kandodo said in order to complement efforts to encourage non-traditional exports and speedy repatriation of proceeds; the Reserve Bank of Malawi will waive the retention/conversion rule for those exporters that demonstrate a good track record of exports and repatriation of proceeds.
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About Gregory Gondwe

Gregory Gondwe is a Malawian journalist who started writing in 1993. He is also a media consultant assisting several international journalists pursuing assignments in Malawi. He holds a Diploma and an Intermediate Certificate in Journalism among other media-related certificates. He can be contacted on . Follow him on Twitter at @Kalipochi.