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Is manufacturing sector on its deathbed?

Malawi’s drop in manufacturing over the past 25 years—which amounts to deindustrialisation—means that the country will find it harder to improve its employment numbers and sustain high economic growth rates, Business Review analysis shows.

Instead, it is the service sector, whose contribution to job absorption rates in Malawi is much lower than manufacturing—according to the African Development Bank (AfDB)—that is recording more growth rates than manufacturing.

The reverse industrialisation—which appears to have started too early for a country in desperate need of development—means that despite paper efforts to add value to raw products such as those from agriculture and the extractive industry, there has been little progress in that direction.

Sustained investment in infrastructure such as road can help save Malawi manufacturing sector

More importantly perhaps is the indication that largely due to trade and economic structural policy challenges, Malawi has lost most of its manufacturing output to company closures and underproduction over the past quarter of a century.

High interest rates, macroeconomic instabilities, high transportation costs; weak industrial linkages, sharp declines in power supply as well the poor policy environment—both at country and regional levels—are among the key drivers of de-industrialisation in Malawi, according to local policy observers.

National Working Group on Trade and Policy chairperson Frederick Changaya said government’s huge appetite for borrowing has kept interest rates high at more than 24 percent, infrastructural problems in sectors such as transport has brought high operational costs for businesses while lack of patriotism has seen locally-manufactured goods and services being shunned even on the domestic market.

He said Malawians have failed to support the local industry because of their appetite for foreign products; hence, killing their own companies and exporting jobs.

Changaya—a top executive at one of Malawi’s few surviving manufacturing firms, Candlex—said there should be a deliberate choice among Malawians to support local brands and help to create companies and jobs.

“We need to love Malawi, we need to be patriotic. However, private companies should also be remitting taxes for government to reduce borrowing,” he said.

“Our exchange rates have not been stable and the cost of borrowing has been high. Cost of production in Malawi is very high, we cannot survive. Government borrowing and corruption has led to the collapse of the manufacturing industry in the country,” he said.

AfDB’s Malawi Country Strategy Paper covering 2018-2022 notes that Malawi’s manufacturing sector—as a ratio of total employment—has dropped by five percentage points from 19 percent in 1994 to 14 percent in 2017. That represents a 26 percent plunge.

On the other hand, the service sector rose from five percent in 1992 to 6.5 percent in 2016, which represents a 30 percent surge.

And while the percentage of service sector’s contribution to employment has jumped, there are still question marks as to whether the rise in the services sector can absorb the jobs lost in industry.

“The economy remains largely services-based, while featuring a low level of industrialisation. The share of employment in industry has steadily declined while that of the services has increased. The share of employment in agriculture, however, remains higher than the other two sectors despite the fact that the service sector is the main contributor to GDP [gross domestic product],” says AfDB in its report.

The report noted that the declining trends in manufacturing value-added and the industrial sector since the 1990s indicates a process of de-industrialisation since the early 1990s.

“The concern is whether the service sector, which is normally high-skill intensive, is able to absorb the labor released from the industrial sector. The fall back will be the agricultural and the informal sectors, where most of the unskilled labour may find itself,” reads the report.

The bank said a more worrying problem was the stagnation and low level of development that, according to the Malawi Economic Justice Network (Mejn), could partly be the product of a shrinking manufacturing sector.

Malawi’s GDP per capita was only $324 in 2017 compared to the medium for sub-Saharan Africa of $ 980.

Mejn acting executive director June Kambalametore said high productivity is important for boosting economic growth and standards of living.

Thus, she said, the impact of the manufacturing sector on the economy cannot be over underlined when one looks at its role in contributing to the country’s development, employment generation and financial impacts.

“The manufacturing sector also contributes significantly to economic development through increased government revenue from tax, increasing standards of living, infrastructural growth contributing to gross national products [GNP]. Having a dying manufacturing sector will have a negative effect on all these factors,” she said.

She stressed the criticality of investing in infrastructure to improve value-added output.

She said for the country to turn around its economic misfortune it must improve fiscal management and gain the trust of donors while solving its energy puzzle as this has a been a major constraint to the economy’s growth.

“Government needs to reduce its debt burden, ensuring that budgets are being formulated and implemented in line with various strategic documents such as the MGDSIII [Malawi Growth and Development Strategy] and investing in strong accountability systems,” she said.

Kambalametore also said there was need for efficiency in government expenditure and planning as well as a need to identify and make concerted efforts to promote industries with future growth potential.

On its part, the Ministry of Trade, Commerce and Industry rejects the notion that Malawi is de-industrialising, with its spokesperson Mayeso Msokera saying contribution of manufacturing and industrial sector to Malawi’s gross domestic product has for the past 10 years remained constant at around 10 percent and 14 percent respectively.

But the government’s own economic report for 2018 shows that since 2015, manufacturing’s share of GDP has fallen steadily from 9.5 percent to roughly 9.1 percent in 2018 and is projected to close 2019 at nine percent.

On the other hand, Msokera said the economy has experienced structural changes with service sector contribution to GDP increasing while agriculture’s contribution has been declining.

Msokera said the slow growth of industry in Malawi is largely attributed to the insufficient and intermittent power supply that the country has been experiencing; high costs and limited access to raw materials for industrial production among others.

Policy direction

The ministry is currently implementing a number of policies, including the National Industrial Policy and the National Export Strategy focusing on promoting value-addition of primary commodities and manufacturing.

The overall goal is to achieve sustainable economic growth through industrialisation and structural transformation of the Malawian economy. To achieve this, the ministry is, among other things, undertaking several other measures to stem deindustrialisation, including infrastructure improvements, improving the productivity of agriculture to be ready to absorb labour that is reallocated from the industrial sector.

Agriculture is the largest sector in the economy, but is characterised by a low level of productivity. In 2017, the sector accounted for 30.2 percent of GDP.

The country’s high dependence on rain-fed agriculture makes the economy more vulnerable to adverse weather conditions; hence, affects national output.

Government also needs to implement business-enabling reforms to spur private sector led growth, so the sector can participate and lead in addressing the large infrastructure requirements, according to AfDB. n

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