Presentation to the 2017 Economics Association Conference

1. Presentation to the 2017 Economics Association Conference By Efrem Chilima Senior Private Sector Specialist World Bank

2. 1. Malawi 2014 Enterprise Survey – to which the ICA is based

4. 2. Snapshot of Findings of the Malawi Enterprise Survey …Parallels were drawn with surveys by the Malawi Confederation of Chambers of Commerce and Industry.… The findings are similar. Cost of finance was cited as one of the top three obstacles in both surveys. The other big obstacles are in the provision of services such as electricity and telecommunication, and corruption as well as economic uncertainty and policy inconsistency

5. 3. Malawi Investment Climate Assessment, 2016 The World Bank conducts investment climate assessments across the globe. ICAs provide a standard for the measurement and comparison of investment climate conditions in a country, creating the platform for the identification of the features of the investment climate that matter most in respective countries. The 2016 Malawi Investment Climate Assessment (ICA), authored by Efrem Chilima, Richard Record, George Clarke and William Mwanza is one such assessment. The assessments, which is second in a series sine 2006, drew comparisons between selected countries in the region and compared its findings with similar assessment conducted in 2008. The latest enterprise surveys in comparable countries were conducted at different times : Zambia (2013), Mozambique (2007), South Africa (2007), Zimbabwe (2016), Tanzania (2013), and Kenya (2013).

6. 4. Private Sector – Engine of Growth “Government recognizes that Private sector is an engine for growth and wealth creation”. Quote from Malawi Poverty Reduction Strategy paper , 2006 to 2011 “Private Sector [Development] is recognized as the engine of economic growth in Malawi”. Quote from IMF Country Report No. 17/184 “Government will always say the private sector is the engine for economic growth. But in reality, this is not what is happening on the ground. In Malawi, private sector is taken as something which we can consult if they wish”. Quote from the Managing Director of BCA in January 2013 quoted at a debate on the progress of the Economic Recovery Plan organized by ECAMA Source: Google

7. 5. Key Constraints according to ICA ….turning to analysis of the enterprise survey …… • The engine (of growth) tells policy makers that, they face key challenges • 1. Finance, • 2. Infrastructure and • 3. Business environment (corruption). • These challenges require focused attention for the economy to grow. Source: Google

8. Number 1 Key Constraint: FINANCING … in response to a question of what managers consider, out of 15 on a list, as the biggest obstacle … • Access to finance was cited as the biggest obstacle – cited as such by almost a third of survey respondents • when asked to what degree access to finance is an obstacle respondents indicated that this was a “very severe” constraint • The rural based, the female headed, the non-exporting, and the domestic oriented firms seem to face more challenges with access to finance than their respective counterparts.

9. Only 26.7 per cent in 2014 indicated that they have a loan or credit with a bank (compared to 40.1 % in 2008) • Access to loan facilities is skewed towards the large-scale enterprises, compared to the medium and the small scale enterprises • Similarly, it is skewed towards the firms engaged in exports (53.3 percent) compared to those with domestic orientation • Firms that are headed by female top managers still reported having more access to bank credit than their counterparts, as did those firms with foreign ownership … access to credit/loans in Malawi is quite low…

10. … Malawi is amongst the countries that have the highest percentage of loans requiring collateral and highest collateral to loan value ratio.… • 92.6 percent of loans in Malawi required collateral (worsening from 88.1 %in 2008) • The value of collateral needed for a loan is equally large at 293.6 percent of the value of a loan. This translates to over three hundred percent above 2008 level and is the highest in the region • evidence suggests very little, if at all any, relationship between value loan requirements and NPLs

11. … as a result firms in Malawi depend heavily on funding investment through own funds …...… • 65.8 percent of total investment is financed internally, and the rest by banks, with little amounts coming from supplier credit, equity or stock sales • A third of the firms in the country use banks to finance investment • The largescale, the export oriented and the foreign owned firms seem to have more access and use banks to finance investments than their local small scale domestic oriented counterpart

12. Number 2 Key Constraint: ELECTRICITY … electricity is generally recognized to be reasonably low-cost, this is however offset at the enterprise level by the cost of investing in and running back-up generating capacity … • 24.8 percent identified this as a severe obstacle • In a typical month, firms reported experiencing 6.7 outages, each lasting an average of 3.5 hours • Malawi firms face challenges to get connected to the electricity grid, as firms reported that it takes 50.4 days to obtain an electrical connection (upon application) in Malawi • For Manufacturing sector electricity is number 1 constraint

13. … Situation worsened in 2014 compared to 2008 as firms continue to face challenges to get connected to the electricity grid… • As a coping mechanism, firms turn to generators to make up for the lost energy • The electricity outages translate into significant losses to industry revenue in Malawi (about 5.1 percent of annual sales)

14. … Situation worsened in 2014 as number of outages in a typical month deteriorated than in 2008… and is possibly even worse today.. • Prospects for increased manufacturing growth in the Malawi economy are evidently undermined by the outages, and partly by high usage of generators • Electricity outages seem to be a challenge in both the rural and urban centers • Losses in revenue due to electricity outages were slightly lower in the major cities

15. Number 3 Key Constraint: CORRUPTION …corruption is seen as the third most significant obstacle to doing business in Malawi… • Bribery in particular – was validated as an obstacle to business as 30.1 per cent of firms identified this form of corruption as a critical constraint (although better than comparator countries) • The court system in Malawi is also reported to be a major constraint mostly for large enterprises

16. … bribery incidences appear to be increasing in Malawi… and deepening…. • The percentage of firms experiencing at least one bribe payment request within a year rose in 2014, compared to 2008. • Firms reported that in 20.2 percent of public transactions, a gift or an informal payment was requested in 2014. • Malawi is below the average for Sub-Sahara but bribery worsened significantly compared to 2008

17. …gifts in order to meet tax officials, to secure government contracts, to obtain business operating licenses, import licenses, construction permits, and to get connected to an electricity grid or water supply…. • The percentage of firms reporting experiencing these ranged between 16.6 and 34.5 percent in 2014 from as low as 0 to 12.8 percent in 2008 • 33 percent of firms interviewed in the 2014 survey (compared to 21.7 percent in 2008) reported that they were expected to give gifts to secure a government contract • 34.5 percent of firms (compared to 4.9 percent in 2008) were expected to give gifts to get a construction permit.

18. …Malawi was one of the top three worst performers amongst comparable countries in the region with high corruption levels (in form of ‘gifts’) when enterprises get services from public institutions….

19. Other Constraints

20. 6. Key Recommendations from the Analysis …From the analysis it is clear that policymakers face one distinct pathway, namely, the reinforcement in the approach to private sector development in which case, given all the challenges the country faces, the pace of reform for Malawi needs to be focused on critical areas, be more rapid, deep and consistent… • This analysis proposes that the focus should be in four main areas as follows: • Improving access to finance • Focusing finite public sector resources where they can achieve the greatest impact: Infrastructure – especially electricity • Address policy and regulatory challenges to increase predictability and transparency to curb corruption • Focusing on increasing the productivity of firms, particularly medium sized ones: development of an innovation ecosystem and frameworks that facilitate high levels of technology diffusion; and research and development, education and skills development that promote agricultural production and feed into the labor needs of emerging manufacturing sub-sectors

21. Recommendation to improve Access to Finance …Improve access to finance … • Continue some of the recent reforms –credit reference, collateral, and warehouse receipts systems, payment infrastructure and innovations in electronic payments • Concerted efforts on the following: • Continued improvement of the macro situation – inflation, interest rates, settlement of arrears by public sector to private sector • Long term financing schemes • New financial instruments, especially those that target the disadvantaged • Focusing support to the missing middle

22. Recommendations to prioritize infrastructure improvement …Focusing finite public sector resources where they can achieve the greatest impact: Improvements in Infrastructure… • The evidence of this analysis points to the poor supply of utilities, particularly electricity and water • Concerted efforts should be placed on these. • Continuation of legal and policy reforms that have commenced in the energy sector and sound regulation of the sector to bring substantial investment, as well as deeper efforts to improve the governance and efficiency of utility suppliers • Bringing independent power producers and utilization of alternative sources of renewable energy • Expansion of national grid to be able to uptake and efficiently transmit increased generation of electricity • Implementation of interconnector program with Malawi’s neighbors such as Mozambique and Zambia • Alongside the upgrading of electricity, the government should prioritize investments into water and transport infrastructure. On transportation, the Government should prioritize efforts to develop the Nacala Corridor, and improve railway connectivity as well as road networks in order to reduce domestic and international trade costs to make Malawi’s products more competitive.

23. Recommendations to address corruption when obtaining services …Address policy and regulatory challenges to increase predictability and transparency and curb corruption … • Corruption is increasingly seen as a big challenge to business activities in Malawi.This is experienced more significantly in the areas where businesses interact with Government (G2B services) which are also key factors for successful setting up and operations of business enterprises, such as on getting permits for construction, getting electricity connected, obtaining import licenses and acquiring land • Measures need to be taken, especially in Government institutions, to ensure transparency and accountability, as well as to improve the provision of services that facilitate businesses. • Ensure simplification and automation of G2B systems such as licensing and business permit systems • Ensure highly sound public financial management system and processes. Improving the IFMIS infrastructure, and the reductions of cash transactions in favor of e-payments for Government services • Governance institutions should be adequately financed and be provided with the necessary independence to effectively execute their mandates • Implementation of reforms in land governance (new set of land laws) and automation of Land registry to ensure predictability and ease in acquiring land by investors

24. Conclusion …These two pathways summarize well the findings…