Malawi

Lilongwe

key figures• Land area, thousands of km² 118• Population, thousands (2007) 13 925• GDP per capita, USD atconstant 2000 prices (2007) 158

• Life expectancy (2007) 48.3• Illiteracy rate (2007) 34.1

Malawi

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DESPITE REMAINING ONE OF THE POOREST and leastdeveloped countries in Africa, Malawi is beginning tomake real progress in terms of laying the foundationsfor faster economic growth andmore effective povertyreduction.

The year 2007 saw continued stronger economicgrowth of 6.8 per cent following an exceptionally high7.9 per cent in 2006, as the country begins to benefitfrom several years of prudent financial andmacroeconomic management (Figure 1). Interest ratesare now beginning to fall, and the share of creditextended to the private sector has risen as the publicsector no longer crowds out private investment. The

successful deployment of a national fertiliser subsidy,coupled with consistent rains acrossmost of the country,resulted in a bumper harvestinmaize, themost importantstaple crop. Thus, reducedfood security challengestogether with improved central budget discipline ledto a reduction in inflation to 8.6 per cent in 2007 —the lowest inmore than two decades. In order to sustainrapid economic growth, the country will need to addressmore effectively the structural constraints to increasedprivate investment, such as lack of skills and lowproductivity, weaknesses in the business environment,and infrastructural constraints.

The foundations for fastereconomic growth with povertyreduction have been laid.

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n Malawi - GDP Per Capita n Southern Africa - GDP Per Capita n Africa - GDP Per Capita

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Per Capita GDP

Figure 1 - Real GDP Growth and Per Capita GDP(USD at constant 2000 prices)

Source: IMF and National Statistical Office (NSO) data; estimates (e) and projections (p) based on authors’ calculations.

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Recent Economic Developments

GDP growth is estimated at 6.8 per cent in 2007,

down from 7.9 per cent in 2006, when agriculturaloutput rebounded sharply following the ending of thedrought. Growth in 2008 and 2009 is forecast to bemore moderate, at 5.1 per cent and 5.5 per cent,respectively.

While it is likely that economic growth in 2007 stillincluded some element of recovery from the 2005drought, it is also clear that the economy is beginningto respond positively to improved domestic economicand fiscal management through increased private-sectorborrowing and investment, especially in the constructionand transport sectors. After a decade of contraction, themanufacturing sector is also beginning to showpromising, if modest, signs of recovery.

Agriculture, as themainstay of theMalawi economy,was a key driver of the 2007 performance, growing by10.8 per cent; mining and quarrying grew 2.7 per cent;manufacturing 8.8 per cent; construction 13.7 percent; and transport and communications 17.3 per cent.

A second year of good rains saw rising yields formaize, the basis of food security in Malawi, withaggregate production up from 2.61 million tonnes in2005/06, to 3.22 million tonnes in 2006/07. Thenational food requirement for 2007/08 is estimated bythe Ministry of Agriculture and Food Security to be2.25million tonnes. Hence the country will have a netfood surplus of close to 1million tonnes. Similarly, the

proportion of total farm families without food fromtheir own production was measured inMarch 2007 tobe only 6 per cent, down from 42 per cent at the same

time in 2006.

Although good and consistent rains played animportant part in the bumper maize production in2006/07, the successful deployment of a nationalfertiliser subsidy that allows all rural households tobuy 50 kg of chemical fertiliser for MWK 900.00(Malawian Kwachas) (USD 6 [US dollars]),approximately a quarter of the retail price, substantiallyraised yields. The government plans to distribute andsell 200 000 tonnes of fertiliser in the 2007/08 growingseason, accounting for around one-third of the nationalagriculture budget

Almost all crops registered substantial increases inproduction in the 2006/07 growing season comparedwith in 2005/06. In addition to the 24.9 per cent jumpin maize production, rice production was up 19.6 percent to 92 000 tonnes, and groundnut production wasup 29.1 per cent to 263 000 tonnes. Sorghum,millets,pulses, cassava and sweet potatoes also saw increasedproduction of a similar magnitude. Cotton productionwas up by a more modest increase of 5.6 per cent to62 000 tonnes.

Disappointing prices for tobacco sold on theauction floors in 2005/06 translated into somewhatlower production in the 2006/07 growing seasonwith aggregate production down 4.8 per cent to116 000 tonnes.

Government services

Private social services

Finance, insurance and business services

Transport and communications

Distribution

Construction UtilitiesManufacturing

Mining and quarrying

Agriculture

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Figure 2 - GDP by Sector in 2006 (percentage)

Source: : Authors’ estimates based on National Statistical Office (NSO) data.

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In 2006/07, the Government ofMalawi concludedan agreement with an Australianmining company thatwill undertake the exploitation of uranium oxide fromdeposits in Kayelekera, in the far north of the country.This exploitation will considerably increase the levelof private investment (+22 per cent). The governmenthas negotiated a 15 per cent equity stake in the venture.At full capacity by the end of 2008, uranium willbecome Malawi’s second biggest export after tobacco,accounting for 20 per cent of exports and 5 per centof GDP. Regarding the components of final demand,growth of private and public investment sharplyincreased in 2007.

Malawi’s formal manufacturing sector remainssmall, and accounted for 10.8 per cent of GDP in2006; this is down from a high of 32 per cent in 1992(Figure 2).Manufacturing firms also tend to be inward-looking, with only 14 per cent of output exported.

Regarding final demand, it is anticipated thatMalawi will continue to see a modest strengtheningdriven by a gradual improvement in export performance,along with greater confidence in the private sectordemonstrated by similarly modest rises in private-sectorinvestment (Table 1).The agreement signed to developthe Kayelekera uranium mine could, over a decadestarting in 2009, generate output worth about

USD 1.6 billion at current prices, at its peak raisingGDP by 10 per cent and exports by 25 per cent.

Looking ahead, whileMalawi’s economic prospectsfor 2008 and 2009 look brighter than what has beenseen in the last two decades, growth will be fragile anddependent on a number of key factors, including thecontinued successful deployment of the national fertilisersubsidy, the avoidance of serious drought, and continuedprudent macroeconomic management. The outlook isfor a reduction in the rates of growth of both public andprivate investment in 2008 and 2009 compared to2007. However, if major new investments in uraniummining and sugar production come into fruition as percurrent plans, then substantially stronger exportperformance could be a key driver ofMalawi’s economicgrowth in the next five years.

Macroeconomic Policy

The current administration has continued to putthe maintenance of macroeconomic stability at theheart of national policy. Increased confidence in thecapacity of the government to manage resources wasdemonstrated by the World Bank’s decision to beginproviding general budget support to the country, withthe first of three USD 20 million Poverty Reduction

Table 1 - Demand Composition

Source: National Statistical Office (NSO) data; estimates (e) and projections (p) based on authors’ calculations.

Percentage of GDP Percentage changes, Contribution to real(current prices) volume GDP growth

1999 2006 2007(e) 2008(p) 2009(p) 2007(e) 2008(p) 2009(p)

Gross capital formation 15.2 9.8 15.5 10.3 7.2 1.2 0.9 0.6Public 10.5 6.4 12.0 7.5 5.5 0.6 0.4 0.3Private 4.7 3.4 22.0 15.0 10.0 0.6 0.5 0.3

Consumption 103.1 113.2 10.3 4.8 5.6 10.9 5.2 6.1Public 13.8 15.2 10.9 7.2 7.0 1.5 1.0 1.0Private 89.3 98.0 10.3 4.4 5.3 9.4 4.2 5.0

External demand -18.3 -23.0 -5.3 -1.0 -1.2Exports 26.1 30.0 3.6 5.3 6.3 0.8 1.1 1.4Imports -44.4 -53.0 17.3 5.5 6.7 -6.1 -2.2 -2.6

Real GDP growth 6.8 5.1 5.5

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Support Credits released in October 2007. For thefirst time since it joined the Fund, Malawi has nowachieved satisfactory performance under the country’s

IMF programme for three consecutive years.

Fiscal Policy

It is expected that stronger tax revenues in 2007/08(up to a new high of 21.9 per cent of GDP), togetherwith reduced interest payments (down to a new lowof just 3.1 per cent of GDP) will lead to an increase infiscal space, permitting an increase in both recurrentand capital expenditures. Nevertheless, the primarybudget balance is expected to remain close to zero (butpositive in 2009), and the overall budget deficit isexpected to be sustainable.

Grants have risen strongly since 2004/05 whendonor confidence was restored in Malawi with theelection of the new government, more than doublingfrom a low of 7.2 per cent of GDP in 1998/99 to16.3 per cent in 2007/08 and accounting on averagefor just under 40 per cent of the total budget. Aggregatedonor inflows and tax revenues have grown stronglyin the last three years, but similarly strongGDP growthhas seen the share of total revenue and grants remainroughly constant, at 41 per cent in 2007/08.

The increases in revenue collection can be attributedin part to the incentive-based collection schemes andwidening of the tax base. Although the revenue

percentage of GDP did not grow significantly, nominalrevenue mobilisation increased by 20 per cent. Withthe recent redefinition of the make-up of GDP (GDPhas long been understated inMalawi)1, this is a positiveimprovement.

Malawi has continued to make excellent progressin reducing the overall fiscal deficit and paying downdomestic debt. Programme aid and domestic revenueprojections have increased substantially since the budgetwas formulated. By mid-2007, the stock of domesticdebt had been reduced to just 11.5 per cent of GDP.The government expects the stock of domestic debt tostabilise at 10 per cent of GDP in 2008, with interestpayments accounting for around 1.5 per cent of GDP.The government’s debt strategy is to restructure domesticdebt in favour of long-term debt instruments, whichwill substantially reduce the costs associated with short-term debt securities. This, together with the strategyto limit new borrowing, should lead to a decline in thedebt/GDP ratio.

The paying down of domestic debt, which peakedat around 25 per cent of GDP in 2003/04, has freed

Table 2 - Public Finances (percentage of GDP)

a. Only major items are reportedSource: Reserve Bank of Malawi data; estimates (e) and projections (p) based on authors’ calculations.

1999 2004 2005 2006 2007(e) 2008(p) 2009(p)

Total revenue and grantsa 24.3 33.7 41.6 41.2 41.0 40.3 40.9Tax revenue 15.7 19.2 22.3 20.7 21.5 21.6 22.1Grants 7.2 11.7 16.1 18.0 17.0 16.3 16.1

Total expenditure and net lendinga 29.3 40.8 43.3 41.4 42.5 43.5 42.7Current expenditure 23.6 33.3 36.2 34.2 35.0 36.1 35.3

Excluding interest 21.0 26.2 28.2 28.6 30.7 33.0 32.9Wages and salaries 4.9 7.1 7.9 7.8 8.0 8.0 7.9Interest 2.6 7.1 8.0 5.6 4.4 3.1 2.5

Capital expenditure 5.4 7.3 7.0 7.0 7.3 7.4 7.3

Primary balance -2.5 -0.1 6.3 5.4 2.9 -0.1 0.6Overall balance -5.0 -7.1 -1.7 -0.2 -1.5 -3.2 -1.8

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1. The informal sector was included in Malawi’s GDP for the first time in 2006/07.

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up significant resources and permitted an expansion ofthe development budget. However, it remains to be seenwhether political pressures on government spending in

the run-up to the 2009 elections will not reverse theseachievements.

Monetary Policy

After 15months of reductions in inflation, the rateof increase in consumer prices appears to have bottomedout. In 2007, year-on-year headline inflation is estimatedat 8.5 per cent, which represents a significantachievement, since inflation was as high as 17.1 per centin February 2006. Annual inflation has only droppedinto single figures three times in Malawi’s moderneconomic history. Price increases inMalawi are drivenprimarily by domesticmaize production and by the priceof imported petroleum and diesel, so the countryremains vulnerable to weather fluctuations and furthershocks to the world price of oil. Malawi does not havea working automatic compensationmechanism againstoil price changes. There can be delays of up to threemonths for the changes to filter through to pump priceincreases, amounting to the equivalent of a tax on oilimport companies.

In view of the recent progress in reducing inflation,the Reserve Bank of Malawi has not felt the need totightenmonetary policy further. In fact, it cut the baserate from 20 to 17.5 per cent on 1 August 2007, andagain on 1November 2007, to 15 per cent. Consideringthat the base rate was as high as 45 per cent inmid-2004,this also represents a major policy achievement. Theshare of credit to the private sector is now beginningto recover, with the private sector taking a bigger share(60 per cent) than the public sector in 2006 for the firsttime in five years (United Nations DevelopmentProgramme [UNDP] 2007).

External Position

Early trade figures for 2007 show that Malawi’scurrent account deficit has begun to stabilise afterseveral years of relentless expansion (Table 3). Thismay well be evidence that improvedmacro stability hasbegun to translate into better performance by the

private sector. In real terms, total exports of goods grewstrongly, from USD 543 million in 2006 toUSD 628 million in 2007, while imports of goods

rose marginally, from USD 1 039 million in 2006 toUSD 1 066 in 2007. Coupled with a reduction in theservices deficit (as a result of substantially lower foreigninterest payments), the current account deficit narrowedfrom USD 705 million in 2006 to USD 634 millionin 2007. Average export prices for tobacco rose fromUSD 2.34 in 2006 to USD 2.60 per kg in 2007.However, disappointment over prices in the 2005/06season saw reduced planting in 2006/07, and thereforethe volume of exports fell from 124 000 tonnes in2006 to 109 000 tonnes in 2007. As a result, exportsslipped slightly, from USD 289.7 million in 2006 toUSD 284.3 million in 2007 (all figures fromNationalStatistical Office [NSO]).

Tea saw an improved performance during the yearas stable average export prices (unchanged atUSD 1.11 per kg), coupled with increased production(up from 43 100 tonnes to 44 000 tonnes), resultedin greater export revenue. The aggregate value of teaexports therefore rose from USD 47.9 million toUSD 49 million.

Malawi’s sugar sector holds enormous potential,once the country is granted unrestricted access to theEU market from 2009 under the terms of the“Everything But Arms”(EBA) initiative. In late 2006,the owner of Malawi’s two sugar estates, Illovo Sugarof South Africa, was acquired by Associated BritishFoods of the UK, and amajor expansion in both estateand out-grower production is planned in order tocapitalise on the opportunities provided by the liftingof quotas in 2009. Average export prices for sugar grewduring 2007, up to USD 0.55 per kg, fromUSD 0.52in 2006. However, reductions in the volume of sugarexports, down to 83 400 tonnes from 90 200 tonnesin the previous year, led to a slight decline in totalexports, from USD 46.5 million in 2006 toUSD 46.1 million in 2007.

The volume of cotton exported in 2007 was15 000 tonnes, up from 14 000 tonnes in the previousyear. Stable average export prices at USD 0.96 resulted

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in an increased export value, rising fromUSD 13.5 million in 2006 to USD 14.5 million in2007.

Malawi has continued to make progress indiversifying exports away from the traditional coreproducts. Rice, coffee and pulses all saw strong exportgrowth, albeit from a low base. The value of coffeeexports, in particular, surged 60 per cent fromUSD 2.2million in 2006 to USD 3.6million in 2007.Malawi also became a major maize exporter in 2007,reversing the need in recent years for large emergencymaize imports to alleviate hunger, with 400 000 tonnesexported, earning USD 94 million in total. The maindestination for the exports was Zimbabwe.

Despite passing the nominal deadline to concludean Economic Partnership Agreement (EPA) at theend of December 2007, Malawi (negotiating as partof the Eastern and Southern Africa [ESA]configuration) is not yet close to signing an EPA withthe European Union (EU). As one of the LeastDeveloped Countries (LDCs), Malawi already benefitsfrom almost universal tariff- and quota-free access tothe EU market under the EBA initiative, and the lastremaining exception — sugar — will be included,much toMalawi’s benefit, in 2009. Hence, comparedto the non-LDCs, the benefits of signing an EPA aremore limited to Malawi and the other LDCs withinthe ESA grouping. Nonetheless, potential benefits toMalawi include: cementing the improved marketaccess that EBA provides (EBA can be unilaterallywithdrawn by the EU); simplifying rules of origin (amajor area of contention); and increasing the volume

of developmental assistance provided to Malawi bythe EC. In addition, as a member of both the SouthernAfrican Development Community (SADC) and the

Common Market for Eastern and Southern Africa(COMESA),Malawi stands to lose should the countrybe forced into a regional economic grouping withfellow-ESA countries that might see the withdrawalof trade preferences with South Africa, Malawi’s mostimportant trade partner. As doubts about both thevalue and risks of signing an EPA emerge, not leastdue to an energetic debate within civil society, Malawi’sposition remains uncertain. With the current WorldTrade Organization (WTO) negotiations still showingno progress, the significance of concluding an EPAis important to Malawi more from a regionalintegration perspective than from that of improvedterms of trade.

Like other garment exporters in Africa, Malawi isstruggling to compete in international markets withoutthe protection of theWTOAgreement onTextiles andClothing, which ended in January 2005. Exports ofapparel slipped from USD 40.5 million in 2006 toUSD 32.5 million in 2007.

FDI has hovered aroundUSD20-40million duringthe last ten years, but recently increased sharply as aresult of the uranium project mentioned above.Absorbing a project of this magnitude will send a strongsignal to the international private sector that Malawiis now “open for business”; there could also be a realeffect on the growth path and on poverty reduction.Large capital inflows such as this investment will alsohelp to offset the current account deficit and contribute

Table 3 - Current Account (percentage of GDP)

Source: Reserve Bank of Malawi; estimates (e) and projections (p) based on authors' calculations.

1999 2004 2005 2006 2007(e) 2008(p) 2009(p)

Trade balance 1.7 -16.3 -27.2 -18.0 -18.0 -18.9 -18.8Exports of goods (f.o.b.) 21.9 26.2 24.3 19.5 23.0 22.2 21.7Imports of goods (f.o.b.) 20.2 42.6 51.5 37.5 41.0 41.1 40.5

Services -8.4 -8.8 -9.8 -8.3 -10.0 -9.7 -9.4Factor income -1.6 -2.3 -2.0 -1.6 -0.8 -0.5 -0.3Current transfers 0.5 17.3 22.8 21.1 21.0 19.4 18.6

Current account balance -7.8 -10.1 -16.2 -6.7 -7.8 -9.7 -9.9

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to the increased stability of the Kwacha.This investmentwill also contribute to the development of Malawi’sindustrial capacity, and will therefore have a positiveeffect on the level of industrial diversification.

The Malawi Kwacha remained relatively stableagainst the US Dollar at around USD 1 = MWK 140throughout 2007, as the dollar’s weakness balancedout the effects of Malawi’s higher rate of inflationcompared to theUnited States. Import cover is currentlyrunning at 2 months, below the minimum target of3 months set by the Reserve Bank of Malawi, but upon previous figures. The high seasonality of Malawi’stobacco-dominated exports can result in significantswings in foreign exchange reserves over the course ofa year.

Following debt relief under the Highly IndebtedPoor Countries (HIPC) and Multilateral Debt ReliefInitiative (MDRI) in September 2006, in early 2007Malawi’s sovereign debt rating was raised by FitchRatings to investment grade “B-”. This development

can be viewed as an indication of increased confidencein the economy by international private investors.Thisdebt relief reduced Malawi’s debt stock fromUSD 2.97 billion (245 per cent of exports in 2005 netpresent value terms) at the end of 2005 toUSD 488 million (43 per cent of exports) as ofDecember 2006.

Structural Issues

Recent Developments

The year 2007 saw the first full year ofimplementation of the Malawi Growth andDevelopment Strategy (MGDS), the country’s nationaldevelopment plan that has replaced the PovertyReduction Strategy Paper (PRSP). The MGDSrepresents a clear improvement on the previousMalawiPoverty Reduction Strategy, which provided only scantfocus on private-sector issues. The plan emphasisesachieving poverty reduction through economic growth,

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Figure 3 - Stock of Total External Debt (percentage of GDP)and Debt Service (percentage of exports of goods and services)

Source: IMF.

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with the private sector recognised as the engine ofgrowth.

While it is clear that Malawi is now benefitingfrom better macroeconomic management and animproved fiscal and monetary environment, tacklingthe key infrastructural constraints and achieving deeperpolicy reformwill be necessary to sustain rapid economicgrowth.

Malawi has an ongoing privatisation programme.However, since the sale of a majority stake in MalawiTelecommunications Ltd in January 2006, few attractiveassets remain in state hands. Air Malawi has been on“passive privatisation” for several years, meaning thatthe company is effectively up for sale and awaitinginterest from interested buyers. In late 2007, discussionsbegan with Comair of South Africa on a possible saleor partial sale.

Attention is now shifting towards the use of Public-Private Partnerships (PPPs) as a means of leveragingprivate-sector finance and expertise in the provision ofpublic-sector services and infrastructure. While somePPPs have been negotiated under the Privatisation Act,a separate law on PPPs is presently being drafted thatwill provide greater flexibility, allow for the possibilityof agreeing on long-term contingent liabilities, andshift responsibility for promoting and concluding suchagreements from the Privatisation Commission to adedicated PPP Unit housed within the Ministry ofFinance. Given the poor public image and controversialnature of privatisation inMalawi, it is believed that PPPswill be a more successful means of leveraging privatefinance for public infrastructure and services only if theyare clearly separated from the existing law andinstitutions for privatisation.

The restructuring of the Agricultural DevelopmentandMarketing Corporation (ADMARC) continued in2007 with the establishment of Malawi AgriculturalWarehousing and Trading Company (MAWTCO).

MAWTCOwill assume the commercial operations ofADMARC, allowing the corporation to return to itsoriginal role of providing social marketing in areas of

market failure.

Recent research has suggested that firms inMalawiare divided into two groups: a low-growth, low-productivity, short-term returns group; and a high-growth, high-productivity, long-term investing group2.Poor access to finance is the principle barrier thatprevents migration from the low-growth group intohigher growth. While improved macroeconomicmanagement has resulted in lower interest rates andinflation, a number of structural challenges still inhibitfinancial-sector development. The lack of a nationalidentification system makes it difficult for banks toshare credit-scoring information, and there is nolegislation in place to permit information sharing oncreditor history or establish a formal credit informationbureau.

The costs for businesses to carry out basic functionsare also high. According to the Doing Business 2008report, it takes 37 days to start a business in Malawi,comparedwith an average of 15 days inOECDcountries(although this is better than the average of 56 days forsub-Saharan Africa). Similarly, enforcing a debt contractcosts 142 per cent of the claim, compared to an averageof 18 per cent in OECD countries and 49 per cent insub-Saharan Africa. In the Doing Business 2008 report,Malawi is ranked 127th out of 178 countries, better thanTanzania (130th) andMozambique (134th), but behindZambia (116th) and Lesotho (124th).

Recognising that improving the investment climateis necessary in order to increase both domestic andforeign investment, and create jobs, the government isbeginning to take steps that will support private-sectordevelopment. The establishment of a dedicatedCommercial Division in the High Court of Malawi inApril 2007 was amajor step forward, and should reducethe time taken and cost incurred in settling commercial

2. Record and Davies (2007), “Determinants and Impact of Private Sector Investment in Malawi: Evidence from the 2006 Investment Climate

Survey”, paper presented at the Centre for the Study of African Economies Conference on Economic Development in Africa, Oxford

University, 19-20 March 2007.

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disputes. The year 2007 also saw the launch of aUSD 18.7 million “Business EnvironmentStrengthening Technical Assistance Project” funded

jointly by the World Bank and the EuropeanCommission: this project aims to raise the rate ofprivate investment through targeted interventions thatwill reduce the costs of doing business.

Poor infrastructure remains the most significantbarrier to long-run economic development inMalawi.High transport costs — accounting for up to 50 percent of the costs of production in some export sectors,namely tobacco, sugar, tea, cotton and coffee—hampercompetitiveness. Although the rehabilitation ofMalawi’shydropower plants is ongoing, the country still suffersfrom inadequate electricity-generating capacity forcurrent needs. Increased exploitation ofMalawi’smineralresources would require amassive expansion in capacity.In 2007, one positive development in this regard wasan agreement between the Government ofMalawi, theGovernment of Mozambique and theWorld Bank onthe construction of an interconnector that will joinMalawi’s power grid up with Cahora Bassa Hydro andthe Southern African Power Pool.

Technical and Vocational Skills Development

In July 1997, the Ministry of Labour set up aTask Force to review the vocational education andtraining system and to come up with a policyframework to address the problems identified. TheTask Force, comprising stakeholders from both theprivate and public sectors, recommended a new policyon technical, entrepreneurial and vocational educationand training. This became the Technical,Entrepreneurial and Vocational Education andTraining (TEVET) policy.

In January 1999, the Technical, Entrepreneurialand Vocational Education and Training Authority(TEVETA)was created.Themain objectives of technicaleducation and training are to: promote an integrated,demand-driven, competency-based modular technicaleducation and training system; monitor gaps betweensupply and demand for skills; support the adoption andapplication of appropriate skills, and a spirit of

entrepreneurial culture with regard to both wages andself-employment; facilitate sound and sustainablefinancing and funding mechanisms for technical

education and training; and to facilitate and bringtogether the expertise and moderate the differentinterests of stakeholders of technical education andtraining.

Technical and training colleges offer courses insuch fields as forestry, marine science, social welfare andhotel management, as well as in various trades. Thesecourses lead to certificates awarded after studies lastingbetween six months and four years.

Since 2000, TEVETA has been implementing areformedNational Apprenticeship Scheme in order tomake it more flexible and responsive to the demandsof the labour market. Competency-Based Educationand Training (CBET) is the main feature of trainingmethodology.

As from 2006, approximately 2 000 students havebeen admitted into public and private technical collegesin Malawi. There were 1 400 students in 2004.Numbers would have been higher than the current levelhad it not been for the limitation of space and capacityin the existing colleges.There are only seven establishedpublic colleges inMalawi, and they can accommodatefewer than 300 students each year, against enormousyearly demands.

The Private Sector Training Programme in theTEVET System supports training needs analysis andthe development and organisation of training for staffalready employed in the private sector.The process hasthree levels namely: training needs analysis; facilitatingthe development of training programmes; upgrading,refresher and specialised training, and thereimbursement of training costs.

Currently, TEVETA reimburses 33 per cent of thetotal training costs incurred by the employer forapproved training. In a way, this is a direct benefit tocompanies that are levy compliant. To date, TEVETAhas facilitated this kind of training for over45 companies, reaching over 200 employees.

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TEVETA also facilitates the implementation ofon-the-job training through co-operation with partnerorganisations that are involved in the construction of

infrastructures such as schools, and market centres inthe towns and Assemblies. TEVETA attaches youthsfromwithin the areas where the project sites are locatedto this programme, and they receive modular training.TEVETA is currently co-operating with the UnitedKingdomDepartment for International Development(DFID),Malawi Social Action Fund (MASAF) and theSecondary Centres Development Programme (SCDP).So far, over 300 youths have been trained under thisprogramme.

It appears, however, that the government has notachieved the objectives of setting up theTEVETA dueto various reasons. For instance, there is some confusionabout the types and levels of tests and certificates. Oneof the constraints highlighted by the Investment ClimateSurvey of Malawi is the lack of skilled labour, whichis a severe impediment to business operations andgrowth.The underlying causes of this scarcity are two-fold. The education system in Malawi is particularlyweak, especially compared to neighbouring countries.Less than half of the children who start school get pastprimary school level. Less than 60 per cent of studentsenrolling in secondary education graduate to grade 12.Access to higher education is poor, with fewer than4 000 places available, and this is further restricted byfinances and accommodation. There are only sevenpublic technical colleges in Malawi, all established inthe 1960s, and all of which have very poor facilities.In addition, the content of education does not meetthe requirements of employers. The capacity of firmsto compensate for the weak education system throughtraining is also limited. Training budgets are always

the first to be cut in difficult times. With themanufacturing sector shrinking, increased competitionthrough globalisation, and increasing trade liberalisation

and regional integration, companies are focusing onsurvival, and are often too resource-constrained tobecome effective partners in broader national strategiesfor technical and vocational training.

The shortage of skills is one of the leading constraintsreported by manufacturing firms in Malawi. Trainingrepresents one way to address the scarcity of skilledlabour, and is crucial to maintaining a competitivelabour force. For workers with very low levels ofeducation or skills, on-the-job training represents thesingle most important channel of augmenting humancapital.

Table 4 shows how firms in Malawi respond totraining needs. A little over half of formalmanufacturingfirms offer either internal or external training. Only30 per cent of firms offer external training and 45 percent of firms offer internal training. Large firms, foreign-owned firms and exporting firms are considerablymorelikely to provide external and internal training.The lasttwo rows show the proportion of workers that receivedtraining. On average, 19 per cent of skilled workers and12 per cent of unskilled workers in the manufacturingsample received training. Once again, larger, foreign orexporting firms providedmore training to their skilledworkers.The proportion of unskilled workers receivingtraining is remarkably uniform across firm categories.

Evidence from the Malawi Investment ClimateSurvey also shows that while only 22 per cent ofmanufacturing firms had a formal training programme,firms that offer training havemuch greater productivity

Table 4 - Provision of Training (percentage of firms)

Source: Malawi 2006 Investment Climate Survey.

Small Medium Large Domestic Foreign- Non- Exporter Totalowned exporter

% Offer any training 44.4 47.5 63.5 46.6 66.7 45.1 75.8 51.6% Internal training 37 42 58 41 59 40 64 45% External training 24 28 40 24 49 23 58 30% Skilled 14.8 21.4 22. 9 17.0 25.9 16.9 27.9 19.3% Unskilled 11.7 11.6 11. 9 11.8 11.6 11.8 11.4 11.7

1 2 http://dx.doi.org/10.1787/323422358580

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(59 per cent higher) compared to those that have notraining programmes.

TheMalawi Investment Climate Survey also askedfirms in the informal-firm sample whether they providetraining to their workers and, if not, for reasons for notproviding training. Two important results emergedfrom the analysis. First, the likelihood of trainingprovision is much lower than among formal firms.Only 38 per cent of informal firms provide training.Moreover, this training consists primarily of internaltraining. Cost, a lack of incentives and a lack of demandaccount for a large percentage of responses of firms thatdo not provide training. Sixty-one per cent of firms thatdo not provide training do not perceive a need for it.Given that a similar proportion of firms report thattraining costs are prohibitive, it is difficult to establishwhich of these two reasons dominates.

The fact that only half of the formal sector providesany training, combined with the fact that half of firmsreport the availability of skilled workers to be a majorconstraint, points to an acute shortage of mechanismsto enhance the human resource base for the private sectorinMalawi.While on-the-job training could provide animportant source of human capital improvement, theproblem of skilled labour shortages appears to be moredeeply rooted in the education system.The analysis fromthe Ministry of Labour shows that candidatesundertaking technical and vocational (T&V) trainingfrom the formal sector pass theory well and are weakon practical skill examinations, whereas candidatesfrom the informal sector pass practical skills well andare weak on theory. In response to this, the Ministryis planning to better equip the training institutionswith adequate equipment for formal training, while inthe informal sector they plan to provide a wide rangeof self-learning materials. The analysis also found that100 per cent of syllabi in Malawi were outdated3.

In recent years, the Malawian government hasintroduced a formal training policy through theTechnical, Entrepreneurial and Vocational Education

andTraining Authority (TEVETA).There is aTEVETAlevy (1 per cent of total payroll for all employees) thatis paid through the Private SectorTraining Programme

(PSTP).Those that pay this levy are entitled to severalforms of training assistance from the government anda reimbursement of 33 per cent of total training costs.TEVETA realised total revenue of MWK 500 000(USD 3.6 million). However, in reality the outreachand provision of training by TEVETA has been quitelimited. On a positive note, TEVETA is now gainingacceptance as an organisation that can deliver qualityservice, and there is an increasing demand for its services.

Given these two self-reinforcing limitations, thereare two policy options open to the government. Thefirst is a short-term policy to provide training to workerswho can no longer return to school. This can be doneeither by providing incentives for firms to train theirworkers, or by providing incentives and facilities whereprivate firms can host training sessions.There is howeverwidespread evidence to suggest that incentives do notwork well, particularly where governments operateunder severe budget constraints. TEVETA can play apivotal role here by having a more proactive strategyfor mobilising the private sector into becoming a betterpartner for TEVETA in training their employees. Partof TEVETA’s current strategy is to leverage its activitiesthrough linkages with other partners (bilateral donors,World Bank, corporate, non-state actors, civil society,etc.). Given the poor in-house training capacity inmuch of the private sector, TEVETA’s main challengehas been to get the right skills training into the rightsectors in an effective manner. The shrinkingmanufacturing sector is pushingmore semi-skilled andskilled people into the informal market in order tosurvive. TEVETA uses an entrepreneur-trainingprogramme to assist both trainees and workers who losetheir formal employment to cope in the informal sectorthrough self-employment.The key problem faced withrespect to entrepreneurial training for the informalsector is to identify needs effectively and to provide thebest fit through technical and vocational trainingprogrammes.

3. Trade Testing Services Directorate, Ministry of Labour.

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The second policy option would be a medium- tolong-term policy aimed at improving the capacity andquality of schools. An important feature of an improved

education system would be a revamped curriculumthat is sensitive to the skill requirements of employers.This would be achieved through the following: review,rehabilitation and modernisation of all technical andvocational education centres, both at secondary andtertiary levels4; introduction of new and emergingtechnologies to a selected number of secondary andtertiary education institutions; and expansion ofpartnerships with the private sector to assist in on-the-job training or technical and vocational skillsdevelopment for more than just their employees(i.e. placements)

Political Context

In 2007, political infighting continued to threatenMalawi’s nascent economic recovery. PresidentMutharika was elected inMay 2004 under the auspicesof the United Democratic Front (UDF) party, butwithin a year had left the party and established a newDemocratic Progressive Party (DPP), allegedly due toUDF opposition to his anti-corruption campaign.

Although by-elections in late 2005 and early 2006saw the election of the first six directly electedDPPMPs,President Mutharika continues to govern without aparliamentary majority. The process of debating thenational budget has become increasingly fraught, andthe 2007/08 budget was passed after almost threemonths of delays. A large backlog of outstanding billshas accumulated, as the legislative branch tries to usewhatever leverage it can to frustrate the executive.

The impeachment motion launched by oppositionMPs, which had appeared to fizzle out, was reignitedduring the budget debate. While the budget waseventually passed, legal wrangling surrounding the useof Section 65 of the Constitution (which provides forthe Speaker to declare vacant the seat of any opposition

MP who has crossed the floor to side with thegovernment) still hangs over the operations ofgovernment.

Social Context and HumanResources Development

While GDP growth has picked up in the last4 to 5 years, it will take some time before this translatesinto improved poverty outcomes. Malawi has one ofthe poorest distributions of income in the world, withaGini coefficient of 39 in 2004.The poverty headcountratio stands currently at 54.2 per cent, and has hardlychanged since the last household survey was undertakenin 1997/98. Social indicators are also very poor.

The national adult literacy rate is still low, at 66 percent in 2007. It is higher among females (78 per cent)thanmales (54 per cent).The overall youth literacy rateis 76 per cent, which is higher than the adult literacyrate. Interestingly, there is not much disparity betweenthe literacy of young females and males. According tointernational sources, primary gross enrolment ratio is120 per cent.The rate is slightly higher for girls (121 percent) than for boys (118 per cent).These high enrolmentnumbers indicate that a large proportion of primaryschool pupils are overage for their grade. This couldpartly be explained by delayed enrolment along withhigh dropout and repetition rates.

The 2004MalawiDemographic andHealth Surveyfound that 8 per cent of children aged 5 to 14 workedfor non-household members. About 40 per cent ofthese children work without pay. Among children whohelp around the house with household chores, 68 percent do these chores for an average of less than 4 hoursper day, and 2 per cent work for 4 or more hours perday. Overall, older children and children in rural areasare more likely to be working. Girls are more likely thanboys to do domestic work. It is particularly worrisomethat a recent ILO survey found that at least 71 percent of children were in the worst form of child labour.

4. Report on present and future directions of Technical and Vocational Training (UNESCO, January 2006).

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There is currently a special task force in the Ministryof Labour working on this issue, and there has beensubstantial measurable improvement in this area.

Malawi, like the rest of Southern Africa, has veryhigh levels of HIV prevalence.The last figure availablereported that HIV prevalence at rural clinics increasedfrom 12.1 per cent in 1999 to 14.5 per cent in 2004.Much remains to be done for behavioural change totake place in Malawi. In 2004, only 5 per cent ofwomen and 15 per cent of men who had sex in the pastyear reported having used a condom during their lastsexual intercourse with any partner. At 1.8 per cent,condom use is alarmingly low amongmarried women.This may point to the difficulty which women face innegotiating the use of a condom with their husband.Better-educated persons aremore likely to use condoms.For example, while 2 per cent of women with noeducation used a condom during their last sexualintercourse with any partner, the correspondingproportion for women with secondary or highereducation is 14 per cent. The proportions for men are6 and 27 per cent, respectively.

The last statistics on population from the UnitedNations highlighted that the total fertility rate forwomen aged 15 to 49 has declined from 7.6 births per

woman twenty years ago to 5.4 in 2007. Contraceptiveuse, especially use of modern methods, has continuedto rise since the early 1990s and is one of the principalcauses of the fertility decline.The prevalence of moderncontraceptive methods amongmarried women aged 15to 49 has increased from 7 per cent in 1992 to 33 percent in 2004.Themost popular contraceptive methodamong married women is injectables, followed byfemale sterilisation, and the pill. Malawi’s maternalmortality rate is currently 984 per 100 000 live births,which is also one of the highest in the world.

The Welfare Monitoring Survey shows that thenational labour force participation rate has declinedslightly, from82 per cent in 2005 to 81 per cent in 2006.Themale labour force participation still remains higherthan the female. The national unemployment rateamong 15-24 year-olds has not changed from 2005 to2006, and the rate for females is higher than that formales in both years.

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