Wednesday, January 11, 2012

Malawi and Foreign Exchange

By Richard Chirombo
The Malawi economy could create a niche among top African countries
that benefit significantly from service exports, but unfriendly
foreign remittance instruments have translated into a negligible Gross
Domestic Product (GDP) contribution from the country’s human resource
capital abroad.
Malawi is grappling with a forex shortage problem that has paralysed
its ability to import essential goods and services. But the Economics
Association of Malawi (Ecam) says foreign remittances have the
potential to help heal the battered economy and lift the market gloom.
Statistics from the National Statistical Office (NSO) imply that
financial contributions from Malawians abroad could make less than 4
percent of GDP. This is shown in an April 2011 report released by
NSO’s Economics Division, and published in its GDPflash publication,
which conspicuously fails to mention remittances’ actual contribution
to GDP.
Instead, foreign remittances are included under the ‘Other services’
slot, rendering impossible efforts to establish its real value
Among others, NSO’s 2007-2010 ‘GDP by Activity Report’ only mentions
accommodation and food service; information and communication; human
health and social work; transport and storage; real estate; financial
and insurance; mining and quarrying; professional, scientific and
technical, administrative and support activities; agriculture, forests
and fishing; wholesale and retail trade; manufacturing; and, other
Of these, agriculture, forestry and fishing contribute more to GDP, at
30 percent, followed by the wholesale and retail sector at 20 percent,
financial and insurance activities at 6 percent, transport and storage
4 percent, human health and social work 4 percent, other services 4
percent, information and communication 3 percent, among others.
The situation forced former Finance Minister, Ken Kandodo, to urge
Malawians in Diaspora to start remitting foreign currency back home as
one way of pumping up depleted forex banks back home.
Finance and Economic Planning Minister, Ken Lipenga, was not picking
up his mobile phone between Tuesday and Thursday when we wanted to
know if Malawians have taken heed of the ministry’s call.
Ecam president, Naomi Ngwira, said this week research on the financial
contribution of Malawians in Diaspora was attempted in 2005 by Alimon
Mwase under the aegis of the Malawi Government and United Nations
Conference on Trade and Development (UNCTAD) and, in a nutshell,
pointed at the potential benefits of forex remittances to the local
economy. The report has not been distributed.
UNCTAD, established in 1964 to provide a forum where developing
countries could discuss economic development challenges, grew from
widely-held conceptions that the World Trade Organisation, World Bank,
the International Monetary Fund and World Bank cannot effectively
handle development challenges prevalent in developing countries like
“Of course, they (foreign remittances) do (have an economic impact).
The Malawi economy could be among those that benefit much from
remittances. One way to facilitate transfer of forex through offering
financial instruments and also investment opportunities in PPPs.
Improving the legal and service environment for remitting forex for
those who are employed is the other policy area,” Ngwira said.
She, however, said this depended on reforms in development planning,
logistics, and improved engagement mechanisms with those in Diaspora.
Ngwira suggested that development planning include mechanisms on how
to prepare for export of services. She also asked for the need to
revisit the logistical and legal framework for making and remitting
payments back home.
Malawi could also benefit significantly “if there was enhanced
involvement of the Diaspora in financial markets’ instruments, Foreign
Direct Investment (FDI), Public Private Partnerships and venture
capital investments”.
She said the country could take advantage of the demand for human
capital to prop up its foreign currency reserves.
“Services like teaching - high school and university- medicine,
aviation pilots, nursing, housekeeping and chauffeurs are in much
demand in Europe, Asia and the Arabian peninsula, where incomes have
risen significantly such that middle income consumers want good
quality services but find that local labour is expensive. Some
countries like Sri Lanka, the Philippines, or those in the Caribbean,
depend a lot on export of services.
“So, Malawi could expand the export of services by entering into
proper agreements with partner countries, partly to protect their
rights, and training more people in those services required. This
requires doing periodic environmental scanning to know the skills
demanded for the moment.
“For example, English teachers are in great demand in non-English
speaking Asia and Arabian peninsula. Malawi should be able to offer
crash courses for specialized kinds of teachers needed in these
countries, as well as nurses, and chauffeurs,” Ngwira said.
For this to happen, however, there is need to encourage people to
channel their money through the official financial system, which
Ngwira said was “presently not the case”.
“Remittances can aid various forms of development- construction of
houses, education and as venture capital. They add to forex reserves
which are critical for importation of raw materials and general
imports and hence economic growth. Remittances boost rural economic
activities and soci0-economic change and, therefore, have development
impact, ”Ngwira said.
All these benefits are being hampered by institutionalised bottlenecks.
“There has been much done but, perhaps, not enough to persuade huge
inflows into the formal forex and financial system given the lucrative
black market rates and limitations on forex/capital inflows in banks.
“The legal framework needs to be revised to allow for a fully
liberalised capital account that allows for ease of in and outflows.
The use of the informal system further means inflows are not captured
in the official accounts (Balance of Payment statistics),” Ngwira
Ngwira said the situation could be improved by minimising the
discrepancy between black and official market forex rates, a
development that calls for liberalisation of the Kwacha.

The second option is to remove restrictions on forex and capital
account outflows so that individuals and institutions running Foreign
Currency Denominated Accounts (FCDA) are able to withdraw as much as
they want “any time or, at least, given priority unless there are huge
forex shortfalls”.
She said further liberalisation of the market would promote FCDA
accounts’ opening, as “remitting forex becomes more conducive with
improved access to formal remittance transfer channels and with
increased transparency of the flows and the (low) cost structure”.
“Otherwise, for those in the Diaspora, one is better off keeping the
forex outside and changing at the black market back home when need
arises,” Ngwira said.
Reserve Bank of Malawi (RBM) spokesperson, Ralph Tseka, acknowledged
on Tuesday that forex remittances make a contribution to a nation’s
“In fact, foreign currency remittances are included in our Gross
National Disposable Income calculations, along with goods transfers
and incomes,” Tseka said.
Tseka said, however, that NSO was the right authority to speak on
foreign currency remittances’ contribution to the country’s GDP.

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