Malawi strengthens relations with India

The assistance will include energy, manpower training and information technology. Malawi this week sent a delegation to New Delhi, led by Foreign Minister Davies Katsonga, which held talks with Indian Minister of State for External Affairs Anand Sharma on bilateral and global issues. Sharma thanked Malawi for its “valuable support” for India’s candidature for permanent membership of United Nations Security Council and the newly established UN Human Rights Council to which India got elected with the largest number of votes. ‘India also welcomed Malawi’s decision to open a diplomatic mission in New Delhi,’ external affairs ministry spokesperson Navtej Sarna told reporters. Katsonga, impressed by India’s development model, sought Indian expertise, technical and financial assistance, and technologies and equipment for development of its infrastructure, setting up of small- and medium-sized enterprises, food security and diversification of agriculture and economy. Sharma offered Malawi agreements in diverse areas ranging from joint exploration of mineral resources and the development of thermal and hydropower projects to technology for rural electrification to information technology and manpower training. “We have a liberalised trade system with tariffs averaging at 12 percent and Indian investment in our country in various sectors is welcome,” Malawi Minister of Finance Goodall Gondwe said. India’s main exports to Malawi include machinery and instruments, cotton yarn, fabric, pharmaceuticals, jute hession and rubber manufactured among other commodities. India’s exports to the African country grew by 48,99 percent at US$56,92 million in 2004-05. The country is looking at purchasing equipment for the small industries and increasing cooperation with India in agro-processing, Gondwe said, adding that tobacco and cotton were the main areas that his country would focus on. Malawi’s trade earnings are dependent on the world prices of tobacco, tea and sugar, with these three commodities accounting for 76 percent of domestic exports. Investors in Malawi have a free access to the Southern African Development Community (SADC) markets and have the opportunity to sell their products in the Common Market for Eastern and Southern Africa (COMESA) region, Katsonga said. Meanwhile, an economic expert has warned the Reserve Bank of Malawi (RBM) against maintaining an overvalued exchange rate, saying this impacts negatively on the performance of the private sector. Simon Oosterman, Systems Advisor for National Smallholder Farmers’ Association of Malawi (Nasfam) made the observation during a paper presentation on exchange rate management and devaluation-past and present, by RBM Governor Victor Mbewe in Lilongwe recently. He said maintaining an overvalued exchange rate has “very serious” implications on the private sector, which in turn affects economic growth in the end. He cited failure of exporters to receive their full benefit of their export sales, foreign exchange hoarding, shortage of foreign exchange that reduces the efficiency of trade as some of the examples. Oosterman noted that exporters are effectively paying at the market rate for their imported goods and then only receiving the official rate for their exports, a difference of 10-15 percent. “Importers, including the government, are benefiting from the difference between the official rate and the market rate. “If they had to buy forex at the market rate, their import costs in Malawian kwacha would increase,” said Oosterman, adding that the government and importers that are able to get forex through the official channels are effectively being subsidised by exporters. The Nasfam official therefore said the current exchange rate policy is not pro poor as the majority of the poor are unable to buy most of the imported consumer goods. He suggested that the Malawian kwacha should be allowed to find its market value and preferably be somewhat undervalued to compensate for the distorting structural impact of large donor inflows. But Mbewe attributed the problem to the country’s narrow export base, impact of droughts, market failure and reduced donor inflows in the recent years. “Fundamentally, the economy’s narrow export base means that the demand for foreign exchange exceeds its supply, by far. This in turn has serious ramifications on the functioning of and the management of exchange rate system in the country,” said Mbewe. He said this limits the flexibility of the central bank to adopt an optimal exchange rate policy and interferes with the price discovery function of the foreign exchange market. “Thus, functioning of a flexible exchange rate regime has persistently been haunted by ratchet exchange rate depreciation and excessive market speculation and hence lately the fear of floating,” he added. He, however, said the Reserve Bank was implementing a managed float system to mitigate the problem and would revert to a fully market based system as suggested by Oosterman when conditions were right.

May 2006
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