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Diplomacy in Action

2012 Investment Climate Statement - Malawi


2012 Investment Climate Statement
Bureau of Economic and Business Affairs
June 2012
Report
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Openness to, and Restrictions Upon, Foreign Investment

The government encourages both domestic and foreign investment in most sectors of the economy without restrictions on ownership, size of investment, source of funds, or the destination of the final product. There is no government screening of foreign investment in Malawi. Apart from the privatization program, the government's overall economic and industrial policy does not have discriminatory effects on foreign investors. Since industrial licensing in Malawi applies to both domestic and foreign investment, and is only restricted to a short list of products, it does not limit competition, protect domestic interests, or discriminate against foreign investors at any stage of investment. Restrictions are based on environmental, health, and national security concerns. Affected items are firearms and ammunition; chemical and biological weapons; explosives; and manufacturing involving hazardous waste treatment/disposal or radioactive material. All regulations affecting trade (foreign exchange, taxes, etc.) apply equally to domestic and foreign investors. While not discriminatory to foreign investors, investments in Malawi require multiple bureaucratic processes, which may include licensing and land use permissions that can be time consuming and may constitute an impediment to investment. The government has done little to simplify or streamline the process to attract increased investment.

Despite government efforts to promote foreign investment, a number of factors have contributed to limiting such investment. These include high transportation costs, unreliable power and water supplies, cumbersome bureaucracy (especially for imports and exports), difficulty in accessing foreign exchange, lack of skilled labor, and government market interventions. After several years of steady increases, Foreign Direct Investment (FDI) declined by 64% from 2008 to 2009 from $170 million to $60 million; however, the amount of FDI in 2008 was significantly above average with investments in a large uranium mine. FDI in 2010 totaled $140 million or 2.74% of GDP.

Malawi has so far privatized 65 formerly state-owned enterprises. A revised divestiture sequence plan to privatize another 65 public enterprises has stalled in the cabinet over the past years pending cabinet approval. All investors, irrespective of ethnic group or source of capital (foreign or local) may participate in the privatization program. However, the Malawi Stock Exchange regulations limit participation of an individual foreign portfolio investor to a maximum of 10% of any class or category of security under the program; and limit maximum total foreign investment in any portfolio to 49%. Malawian nationals are offered preferential treatment, including discounted share prices and subsidized credit. Subsidized credit carries a precondition that the shares or assets be retained for at least two years.

A variety of indices measure aspects of a country’s business environment. Malawi’s performance for several of these indices is shown below. The percentile rank for the Millennium Challenge Corporation (MCC) indices are measured against the group of low income countries (per capita income less than $1,915).

Measure

Year

Index/Ranking

TI Corruption Index

2011

3.0 (rank 100 of 183)

Heritage Economic Freedom

2011

55.8 (rank 119 of 179)

World Bank Doing Business

2011

2012

Rank 141 (of 183)

Rank 145 (of 183)

MCC Gov’t Effectiveness

(World Bank/Brookings Institution WGI)

2012

0.46 (90%)

MCC Rule of Law

(World Bank/Brookings Institution WGI)

2012

0.79 (97%)

MCC Control of Corruption

(World Bank/Brookings Institution WGI)

2012

0.37 (86%)

MCC Fiscal Policy

(National sources/IMF WEO)

2012

-3.1 (42%))

MCC Trade Policy

(Heritage Foundation)

2012

70.9 (59%)

MCC Regulatory Quality

(World Bank/Brookings Institution WGI)

2012

0.17 (64%)

MCC Business Start Up

(IFC Doing Business 2011 report)

2012

0.890 (32%)

MCC Land Rights Access

(IFAD/IFC)

2012

0.712 (76%)

MCC Natural Resource Mgmt

(CIESN/YCELP Natural Resource Management Index 2010)

2012

97.3 (64%)

Conversion and Transfer Policies

There are no restrictions on remittance of foreign investment funds (including capital, profits, loan repayments and lease repayments) as long as the capital and loans were obtained from foreign sources and registered with the Reserve Bank of Malawi (RBM). The terms and conditions of international loans, management contracts, licensing and royalty arrangements, and similar transfers require initial RBM approval. The RBM grants approval according to prevailing international standards; subsequent remittances do not require further approval. All commercial banks are authorized by the RBM to approve remittances, and approvals are fairly automatic as long as the applicant's accounts have been audited and sufficient foreign exchange is available. In practice foreign exchange availability is very limited and remittances often cannot be made

even if approved. Many businesses have recently complained of a lack of foreign exchange to pay for importation of raw materials, causing such businesses to operate below capacity. Traditionally, foreign exchange availability follows the agricultural cycle in Malawi. It is generally plentiful from April through September (when tobacco

sales generate foreign exchange inflows), and scarce from October through March. During periods of scarcity, investors may experience extended periods without access to foreign exchange. Since 2009, Malawi has experienced uncharacteristic foreign exchange shortages even during the tobacco auction season. The shortage of foreign exchange reached crisis levels in 2011 and has created serious shortage of medicines and fuel. Chronic fuel shortages and power black-outs have had a devastating effect on industrial output and overall productivity. The situation is unlikely to significantly improve in 2012.

Expropriation and Compensation

Malawi's constitution prohibits deprivation of an individual's property without due compensation. There are effective laws that protect both local and foreign investment. The likelihood of direct expropriations has been low since the repeal of the forfeiture act

in 1992. Some measures with expropriatory effects are occasionally imposed. For example, in both 2008 and early 2012 the government imposed export bans on maize. Furthermore, the government unilaterally revoked the licenses of all private maize traders in the country. These restrictions applied equally to foreign and domestic investors. Although public tenders for the sale of shares of state-owned enterprises often encourage local participation, foreign investors tend to dominate the share-holding of large Malawi Stock Exchange-listed companies requiring significant technical and financial resources.

The Land Reform Commission—which the government established in 1996 to review land tenure and establish a new land reform program—presented its final report to the President in November 1999. In January 2002, the Ministry of Lands published a new land policy. Draft legislation has been prepared that incorporates many recommendations of the Commission's report, including the abolition of freehold tenure (owners holding permanent title) and the conversion of all freehold titles to leasehold (owners holding land on lease for a maximum period of 99 years). The Ministry of Lands and the cabinet have approved the new legislation however the bill has stalled in the Parliamentary Committee on Lands and Natural Resources. The bill has been under scrutiny since 2002. Since July 2000, the Malawi Government stopped issuing freehold land in anticipation of this new legislation.

At present, the government may employ land acquisition procedures set forth in the Land Acquisition Act of 1971. According to this Act, the government must justify its acquisition as being in the public interest and must pay fair market value for the land. Fair market value is assessed by summing the amount the owner originally paid for the land, the value of any permanent improvements that increase the productive capacity, utility or amenity of the land, and any appreciation of the land value. If the private landowner objects to the level of compensation, he may obtain an independent assessment of the land value. According to the Act, however, such cases may not be challenged in court; the Ministry of Lands, Housing and Urban Development remains the final judge.

Dispute Settlement

Malawi has an independent judiciary, which derives its procedures from English Common Law. There has been little government interference in the court system. The commercial courts are working efficiently now that they have qualified personnel who are working toward the improvement of the court system in Malawi. The Commercial Court in Blantyre currently has three judges, and a fourth position remains vacant. The lack of a registry for the commercial division still hampers its functioning. Currently, there is an established mediation process to promote agreements between parties in disputes before court proceedings start.

Although processing of commercial cases has significantly improved in the court system, enforcement of judgments continues to be a problem. The Commercial Court now has one dedicated enforcement Sheriff. Before that the Commercial Court used Sheriffs assigned to the High Court who did not grant priority to commercial enforcements.

The court system in Malawi accepts and enforces foreign court judgments that are registered in accordance with established legal procedure. There are reciprocal agreements among Commonwealth countries to enforce judgments without this registration obligation. However, the fact that there is no such agreement between Malawi and the United States does not mean that judgments involving the two countries cannot be enforced.

Malawi has legislation that offers adequate protection for property and contractual rights. Malawi has written commercial laws, which codify Common Law. The Sale-Of-Goods Act, the Hire-Purchase Act, the Competition Fair Trading Act and Companies Act cover commercial practices. The first two acts have been consistently applied, and there is a track record of cases involving commercial law. In 2007, Malawi established a dedicated

Commercial Court in Blantyre. The Lilongwe division of the Commercial Court opened in 2010. There is also a written and consistently applied Bankruptcy Law based on Common Law. Under Bankruptcy Law, secured creditors—rank-ordered based upon investment registration dates—have first priority in recovering money. Monetary judgments are usually made in the investor's currency. However, the immediate availability of foreign exchange is dependent upon supply, which varies on a seasonal basis and was chronically low for the past three years. The 2006 Money Laundering, Proceeds of Serious Crime and Terrorist Financing Act established an autonomous Financial Intelligence Unit (FIU) to combat money laundering and terrorist financing. The FIU is responsible for analyzing disclosures from financial institutions and referring actionable cases to competent authorities. It is also mandated to monitor compliance by reporting institutions.

Malawi is a member of the International Center for Settlement of Investment Disputes (ICSID), and accepts binding international arbitration of investment disputes between foreign investors and the state if specified in a written contract. There have been no major investment disputes involving U.S. companies since 1996.

Performance Requirements and Incentives

Malawi is not in compliance with World Trade Organization (WTO) Trade Related Investment Measures (TRIM) notification requirements. Malawi does not set performance requirements for establishing, maintaining or expanding an investment, nor does it place requirements on ownership, source of financing, or geographic location. The government accords Export Processing Zone (EPZ) status only to firms (foreign or domestic) that produce exclusively for export.

Malawi offers the following incentives, which apply equally to domestic and foreign investors:

General Incentives

  • 100% investment allowance on qualifying expenditure for new building and machinery
  • Allowances of up to 40% for used buildings and machinery
  • 50% allowance for qualifying training costs
  • Allowance for manufacturing companies to deduct all operating expenses incurred up to 25 months prior to the start of operations
  • Zero duty on raw materials used in manufacturing
  • Loss carry forward of up to seven years, enabling companies to take advantage of allowances
  • Duty-free direct importation of building materials for factories and warehouses
  • Duty-free direct importation of goods used in the tourism industry, which includes building materials, catering and related equipment, and water sport equipment
  • Free repatriation of dividends, profits, and royalties

Incentives for Establishing Operations in Export Processing Zone (EPZ)

  • No withholding tax on dividends
  • No duty on capital equipment and raw materials
  • No excise tax on the purchases of raw materials and packaging materials made in Malawi
  • No value added tax

Incentives for Manufacturing in Bond

  • Export allowance of 12% revenue for non-traditional exports
  • Transport tax allowance equal to 25% of international transport costs, excluding traditional exports
  • No duties on imports of capital equipment used in the manufacture of exports
  • No surtaxes
  • No excise tax or duty on the purchase of raw materials and packaging materials

There are also additional incentives for horticulture, mining and tourism.

The above incentives are applied consistently but many companies have complained about long delays in accessing the accrued benefits.

In June 2011, the government imposed the following changes as part of its 2011/2012 national budget:

· The introduction of a turnover (revenue) tax on businesses at the rate of 1% for turnover under MK 50 million and 2% for turnover above MK 50 million (approximately USD 300,000);

· The abolition of the 15% investment allowance given to companies operating under Export Processing Zones (EPZ);

· The abolition of the exemption from corporate tax on profits for companies operating in EPZs;

· The reduction of the investment allowance from 100% to 40% for new and used industrial buildings and machinery in the manufacturing, tourism, energy and agriculture sectors;

· The requirement of tax clearance certificates in order to obtain government approval for business transactions, including: externalization of funds, renewal of temporary employment permits, renewal or extension or transfer of mining licenses, renewal of tourism licenses, renewal of energy licenses, renewal of telecommunications licenses, change of ownership of a company and the renewal of other business licenses;

· An increase from 10% to 15% of the withholding tax on rental properties;

· The introduction of capital gains tax on the sale of shares regardless of time of disposal. Previously, these gains were not taxable if shares were held for more than a year;

· The introduction of value added tax (VAT) on goods previously exempted such as water, bread, meat and edible meat offal, milk and dairy products, residues and waste from food industries, saw dust and wood waste, newspapers, table salt, hessian cloth, machinery, mechanical appliances, spare parts, and fees, charges, commissions and discounts on financial services.

Foreign investors are generally accorded the same treatment as nationals. U.S. and other foreign firms are able to participate in government/donor-financed and/or subsidized research and development programs. The following information is required to register and incorporate a company: name of the company, authorized share capital, registered office, location of account books, address of the company secretary, and the names of directors and shareholders. There is also a requirement that at least two Malawian residents be appointed directors for such a subsidiary company.

Visas do not inhibit investors, but the need for employment permits sometimes can. Expatriate employees (of both domestic and foreign businesses) who reside and work in Malawi must obtain temporary employment permits (TEPs). TEPs have been very difficult to obtain in some instances.

Government policy on TEPs has been unchanged since a "Policy Statement and New Guidelines for The Issuance and Renewal of [Expatriate] Employment Permits" was issued in November 1998. The guidelines state that investors may employ expatriate personnel in areas where there is a shortage of "suitable and qualified" Malawians. The policy provides for two types of TEPs:

· Those for "key posts" (defined as positions of "strategic importance" in business operations) which are granted for the lifespan of the organization.

· Those for "time posts" (defined as positions with contracts of three-year duration or less) which are granted for three-year periods and renewable once.

The policy underscores the government's desire to make TEPs readily available to expatriates, and mandates that processing times for TEP applications shall not exceed 40 working days. In practice these guidelines have been applied inconsistently, leading to delays and some uncertainty.

The government issues Business Residence Permits (BRPs) to foreign nationals who own/operate businesses in Malawi. BRPs are issued for five-year periods and are renewable. Permanent Residence Permits (PRPs) are issued to foreign spouses who reside permanently in Malawi, and to owners/operators of businesses who reside in Malawi for periods in excess of ten years. PRP holders cannot work as employees. Malawi's immigration laws governing BRPs and PRPs have been revised. There are three categories of residence permits based on the amount of investment, the status of applicant (investor, retiree, student, or spouse of a Malawian citizen) and the period of the business assignment. The maximum number of resident permits per organization is five positions, with the actual number allowed depending on the amount of investment.

Right to Private Ownership and Establishment

The government encourages both domestic and foreign investors to establish and own business enterprises in most sectors of the economy. All investors have the right to establish, acquire, and dispose of interests in business enterprises. There are some

restrictions to land ownership by foreigners. Sale of land to foreigners is approved only after no Malawian has shown interest to match the price offered by the foreigner. However, land acquired as part of a business establishment is not subject to this rule.

In principle, public enterprises compete equally with private entities with respect to access to markets, credit and other business operations.

Protection of Property Rights

Both foreign and domestic investors have access to Malawi's legal system, which functions fairly well and is generally unbiased. Heavy caseloads and staffing limitations, however, mean that legal remedies can take a long time to achieve. Malawi has laws that govern the acquisition, disposition, recording and protection of all property rights (land, buildings, etc.) as well as intellectual property rights (copyrights, patents and trademarks, etc.). The government has signed and adheres to bilateral and multilateral investment guarantee treaties and key agreements on intellectual property rights. Malawi is a member of the convention establishing the multilateral investment guarantee agency, the World Intellectual Property Organization (WIPO), the Berne Convention, and the Universal Copyright Convention.

The Copyright Society of Malawi (COSOMA), established in 1992, administers the 1989 Copyright Act which protects copyrights and "neighboring" rights in Malawi. The Registrar General administers the Patent and Trademarks Act, which protects industrial intellectual property rights in Malawi. A public registry of patents and patent licenses is kept. Patents must be registered through an agent. Trademarks are registered publicly following advertisement and a period of no objection. WTO rules allow Malawi (as a less developed country) to delay full implementation of the Trade-Related Aspects of Intellectual Property Rights (TRIPs) agreement until 2016. The Ministry of Industry and Trade is working with COSOMA, the Registrar General, and the Africa Regional Intellectual Property Organization (ARIPO) to align relevant domestic legislation with the WTO TRIPs agreement.

Transparency of the Regulatory System

Malawi's industrial and trade reform program—including rationalization of the tax system, liberalization of the foreign exchange regime, and the elimination of trade and industrial licenses for several items and businesses—has produced written guidelines intended to increase government use of transparent and effective policies to foster competition. No tax, labor, environment, health and safety or other laws distort or impede investment. However, procedural delays and red tape continue to impede the business and investment approval process. While market prices for goods are generally not controlled, prices of most agricultural goods (tobacco, cotton, sugar, and maize), petroleum products, and state-provided utilities are regulated. In recent years the government has announced “minimum prices” for tobacco, cotton and maize which buyers have been obliged to offer, under threat of the loss of their buyers’ licenses. Buyers have complained of a lack of transparency in the setting of these prices. This led the largest cotton ginning company in Malawi, a U.S. company, to withdraw from the country in 2009 after the government-set minimum prices for cotton were deemed too high for profitable operations.

There have been both positive and negative steps towards increasing regulatory transparency and improving the foreign investment environment.

Notable positive developments include: the establishment of the Malawi Energy Regulatory Authority (MERA), the establishment of the Malawi Communication Regulatory Authority (MACRA), the licensing of four cellular phone service providers, two of which are operating, and the splitting of the former parastatal Malawi Posts and Telecommunication Corporation (MPTC) into two separate entities—the Malawi Posts Corporation (MPC) and Malawi Telecommunications Limited (MTL). MTL has since been partially privatized and government retains 20% shares which it intends to off load to the public later.

Notable negative developments include government interventions into the fuel sector and current account transactions (rationing foreign exchange, restricting foreign exchange bureaus, and requiring tobacco sales revenue to go to the RBM instead of the commercial banks). The state-owned Petroleum Control Commission (PCC) relinquished its monopoly on petroleum imports in May 2000, allowing the private sector to import Malawi's entire fuel requirement. In 2011, taking the country back to 2000, the government established a new company called the National Oil Company of Malawi (NOCMA) that has assumed similar functions that were performed by PCC prior to 2000. NOCMA is mandated to import and store fuel for strategic reserves, but since its arrival has been operating in competition with Petroleum Importers Limited—a private sector consortium. Additional government interventions in the financial sector include restrictions on the current account. Since September 2010, the RBM has rationed foreign exchange and required that any request for $50,000 or more for imports be pre-approved. The backlog of requests for foreign exchange in commercial banks is estimated to exceed $800 million. Since July 2011, foreign exchange bureaus are mandated to offer the official rate of the Malawi kwacha which is widely considered overvalued. Throughout the 2011 tobacco sale season the RBM required tobacco sales revenue to be deposited in the RBM instead of passing straight from the auction floors to the farmers’ commercial banks.

Efficient Capital Markets and Portfolio Investment

Traditionally the Reserve Bank of Malawi has pursued a tight monetary policy to bring down the level of inflation. In the recent past, however, the Reserve Bank has moved to a more expansionary approach to monetary policy to promote private sector development, using monetary instruments such as bank rate and liquidity reserve rations that have been progressively reduced over the past five years. Inflation dropped, from 15.4% in 2005 to 8.1% in October 2011. There has been an upward trend in inflation figures for 2011 and the situation is likely to continue as foreign exchange and fuel shortages continue. The bank rate has declined considerably over the past five years, from 45% in 2004 to 13% in 2010, where it remains. The lending rate for commercial borrowers has correspondingly also declined. As a result, there has been an increase in credit extension to the private sector over the same period.

The Malawi kwacha trades as a heavily managed currency against the US dollar. After remaining unchanged for over five years, the rate was allowed to depreciate in late 2009, falling from 143 to 151.8 to the dollar at the end of December 2009. The Reserve Bank of Malawi depreciated the Malawi kwacha (MK) further in August 2011 moving the rate to 168 to the dollar. As of December 2011, the parallel rate on the black market was estimated to be between 220-250 MK to one dollar. Continuing shortages of foreign exchange put pressure on the kwacha and further depreciation is expected in the near future.

The private sector in Malawi has a variety of credit instruments. Credit is generally allocated on market terms. Foreign investors may utilize domestic credit, but proceeds from investments made using local resources are not remittable.

Malawi has a sound banking sector, overseen and well-regulated by the Reserve Bank of Malawi—the central bank. There are eleven full-service commercial banks: National Bank of Malawi (NBM), First Merchant Bank (FMB) Limited, Standard Bank (SB), New Building Society (NBS) Bank, Ecobank, First Discount House Bank, Malawi Savings Bank, Indebank, Nedbank, International Commercial Bank, and Opportunity International Bank. Other financial institutions are: Indefinance, Investment and Development Fund of Malawi (INDEFUND), Finance Corporation of Malawi (Fincom), Leasing and Finance Company of Malawi (LFC), the Malawi Rural Finance Company (MRFC), Continental Discount House, First Discount House, and Trust Securities Limited. Malawi’s four largest banks (NBM, FMB, SB, and NBS) command 90% of the market, with a total capitalization of over $1 billion.

The Companies Act, the Capital Market Development Act (1990), and the Capital Market Development Regulations (1992) provide the legislative and regulatory framework for investment in Malawi. The attendant legal, regulatory and accounting systems are transparent and consistent with international norms. These acts govern the Malawi Stock Exchange (MSE).

Stockbrokers Malawi Limited (SML) is the major registered stockbroker in Malawi. Other brokerage firms are Continental Discount House, First Discount House and Trust Securities Limited. The MSE is regulated by the Stock Exchange Commission.

SML runs a secondary market in government securities, and both local and foreign investors have equal access to the purchase of these securities. The following 15 companies are listed on the MSE: Blantyre Hotels Limited (BHL), First Merchant Bank (FMB) Limited, Illovo Sugar Malawi Limited, Malawi Properties Investment Company (MPICO), National Bank of Malawi (NBM), New Building Society (NBS) Bank, NICO Holdings Limited, National Investment Trust Limited (NITL), Press Corporation Limited (PCL), Packaging Industries of Malawi (PIM), Real Insurance Malawi, Standard Bank (Malawi), Old Mutual, Sunbird Tourism Limited, and Telecom Network Malawi Limited.

The MSE is still in a nascent stage, and hostile takeovers have not yet occurred. Apart from the restrictions under the privatization program, there are no specific measures taken by private firms to restrict foreign investment or participation. Foreign investors tend to be the dominant shareholders in large MSE-listed companies requiring significant technical and financial resources. The Competition and Fair Trading Act does not cover the day-to-day trading on the MSE, but regulates mergers, acquisitions, and takeovers that are of national interest.

The Competition and Fair Trading Act—passed by Parliament in 1998 but made operational in 2000—aims to regulate and monitor monopolies and the concentration of economic power, protect consumer welfare, and strengthen the efficient production and distribution of goods and services. In accordance with the Act, the Ministry of Industry and Trade appointed competition commissioners, who in 2006 established a secretariat to oversee the Act’s implementation. The secretariat is required to approve only those acquisitions, mergers or takeovers that increase employment and net exports, and lower prices for consumers.

Competition from State Owned Enterprises

Private and public enterprises freely compete on the same terms and conditions for access to markets, credit and other business opportunities. There are exceptions, however, for some public works assignments where public enterprises tend to be given special preference by government. There have been several instances where public enterprises such as the National Oil Company of Malawi (NOCMA) and Agricultural Development and Marketing Corporation (ADMARC) have been favored with allocation of foreign exchange over the private sector. The contract to distribute subsidized agricultural inputs is given to Agricultural Development Marketing Corporation (ADMARC) and Small-holder Farmers Fertilizer Revolving Fund (SFFRF) on a priority basis. In the lead up to the 2011 planting season there were virtually no fertilizers available for sale in the private sector. There are no set rules or criteria on such exceptions—the government tends to decide on a case by case basis.

All State Owned Enterprises (SOEs) have an independent Chairperson and Board of Directors. The boards are composed of politicians and professionals as directors. All such boards also have senior government officials representing government departments as ex-officio/non-voting members. The participation of members of the government as ex-officio/non-voting members on these boards creates a perceived and/or real conflict of interest. All SOEs produce annual reports, which are audited by independent professional audit firms. SOEs predominate in the following sectors: energy, water, and agriculture. The Electricity Supply Company of Malawi (ESCOM), Air Malawi, and ADMARC are three examples of parastatals in Malawi. Although signed in April 2011, the U.S. Government’s Millennium Challenge Corporation (MCC) US$350.7 million Compact was put on operational hold in mid-2011 owing to concerns over negative trends in economic and political governance. The MCC Compact Program focuses on the power sector (strengthening ESCOM) and promoting private sector investment in power production.

Corporate Social Responsibility

There is a well-developed sense of corporate social responsibility in Malawi and most corporate entities make a point to publicize such activities in the local media. Large domestic companies and international enterprises tend to be more active and generous than small domestic companies.

Political Violence

Malawi has been largely free of political violence since gaining independence in 1964. Apart from the disarming of the Malawi Young Pioneers, a paramilitary group active during Malawi's 1994 transition to democracy, incidents of violence were few. Sporadic violence occurred in the run-up and immediately following the 2004 elections. Presidential and parliamentary elections in May 2009 were peaceful, with no significant incidences of violence. On July 20 and 21, 2011, nationwide demonstrations over economic and political governance turned violent and 20 Malawians died in the civil unrest that ensued. Although divisions do exist, Malawi has no significant tribal, religious, regional, ethnic, or racial tensions that could be expected to lead to violent confrontation.

Incidents of labor unrest occasionally occur, but these are usually nonviolent. There are no nascent insurrections or other politically motivated activities of major concern to investors. However there have been some political tensions with neighboring Mozambique and Zambia in recent times.

Corruption

Corruption, including bribery, raises the costs and risks of doing business. Corruption has a corrosive impact on both market opportunities overseas for U.S. companies and the broader business climate. It also deters international investment, stifles economic growth and development, distorts prices, and undermines the rule of law.

It is important for U.S. companies, irrespective of their size, to assess the business climate in the relevant market in which they will be operating or investing, and to have an effective compliance program or measures to prevent and detect corruption, including foreign bribery. U.S. individuals and firms operating or investing in foreign markets should take the time to become familiar with the relevant anticorruption laws of both the foreign country and the United States in order to properly comply with them, and where appropriate, they should seek the advice of legal counsel.

The U.S. Government seeks to level the global playing field for U.S. businesses by encouraging other countries to take steps to criminalize their own companies’ acts of corruption, including bribery of foreign public officials, by requiring them to uphold their obligations under relevant international conventions. A U. S. firm that believes a competitor is seeking to use bribery of a foreign public official to secure a contract should bring this to the attention of appropriate U.S. agencies, as noted below.

U.S. Foreign Corrupt Practices Act: In 1977, the United States enacted the Foreign Corrupt Practices Act (FCPA), which makes it unlawful for a U.S. person, and certain foreign issuers of securities, to make a corrupt payment to foreign public officials for the purpose of obtaining or retaining business for or with, or directing business to, any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more detailed information on the FCPA, see the FCPA Lay-Person’s Guide at: http://www.justice.gov/criminal/fraud/docs/dojdocb.html.

Other Instruments: It is U.S. Government policy to promote good governance, including host country implementation and enforcement of anti-corruption laws and policies pursuant to their obligations under international agreements. Since enactment of the FCPA, the United States has been instrumental to the expansion of the international framework to fight corruption. Several significant components of this framework are the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions (OECD Anti-bribery Convention), the United Nations Convention against Corruption (UN Convention), the Inter-American Convention against Corruption (OAS Convention), the Council of Europe Criminal and Civil Law Conventions, and a growing list of U.S. free trade agreements. This country is party to the UN Convention, but generally all countries prohibit the bribery and solicitation of their public officials.

OECD Antibribery Convention: Malawi is not a party to the OECD Antibribery Convention, although it subscribes to the provisions of the convention. (see http://www.oecd.org/dataoecd/59/13/40272933.pdf).

UN Convention: Malawi is a party to the UN Convention. (see http://www.unodc.org/unodc/en/treaties/CAC/signatories.html).

OAS Convention: Malawi is not a party to the OAS Convention (see http://www.oas.org/juridico/english/Sigs/b-58.html).

Council of Europe Criminal Law and Civil Law Conventions: Malawi is not a party to the Council of Europe Conventions. (see www.coe.int/greco).

Free Trade Agreements: Malawi does not have an FTA with the United States. (For U.S. FTAs see the U.S. Trade Representative Website: http://www.ustr.gov/trade-agreements/free-trade-agreements.)

Local Laws: U.S. firms should familiarize themselves with local anticorruption laws, and, where appropriate, seek legal counsel. While the U.S. Department of Commerce cannot provide legal advice on local laws, the Department’s U.S. and Foreign Commercial Service can provide assistance with navigating the host country’s legal system and obtaining a list of local legal counsel.

Assistance for U.S. Businesses: The U.S. Department of Commerce offers several services to aid U.S. businesses seeking to address business-related corruption issues. For example, the U.S. and Foreign Commercial Service can provide services that may assist U.S. companies in conducting their due diligence as part of the company’s overarching compliance program when choosing business partners or agents overseas. The U.S. Foreign and Commercial Service can be reached directly through its offices in every major U.S. and foreign city, or through its Website at www.trade.gov/cs.

The Departments of Commerce and State provide worldwide support for qualified U.S. companies bidding on foreign government contracts through the Commerce Department’s Advocacy Center and State’s Office of Commercial and Business Affairs. Problems, including alleged corruption by foreign governments or competitors, encountered by U.S. companies in seeking such foreign business opportunities can be brought to the attention of appropriate U.S. government officials, including local embassy personnel and through the Department of Commerce Trade Compliance Center “Report A Trade Barrier” Website at tcc.export.gov/Report_a_Barrier/index.asp.

Guidance on the U.S. FCPA: The Department of Justice’s (DOJ) FCPA Opinion Procedure enables U.S. firms and individuals to request a statement of the Justice Department’s present enforcement intentions under the antibribery provisions of the FCPA regarding any proposed business conduct. The details of the opinion procedure are available on DOJ’s Fraud Section Website at www.justice.gov/criminal/fraud/fcpa. Although the Department of Commerce has no enforcement role with respect to the FCPA, it supplies general guidance to U.S. exporters who have questions about the FCPA and about international developments concerning the FCPA. For further information, see the Office of the Chief Counsel for International Commercel, U.S. Department of Commerce, Website, at http://www.ogc.doc.gov/trans_anti_bribery.html. More general information on the FCPA is available at the Websites listed in the web resources at the end of this section.

Exporters and investors should be aware that generally all countries prohibit the bribery of their public officials, and prohibit their officials from soliciting bribes under domestic laws. Most countries are required to criminalize such bribery and other acts of corruption by virtue of being parties to the various international conventions discussed above.

Anti-Corruption Activities in Malawi:

Although progress has been made addressing the issue, corruption continues to be viewed as a major obstacle to doing business in Malawi. There have been serious allegations of corruption, particularly in the area of customs and excise tax, traffic police, immigration and government procurement. The Corrupt Practices Act provides the legal framework for combating corruption in Malawi.

The Anti-Corruption Bureau (ACB) is legally mandated to investigate corruption in Malawi. Opened in 1997 and fully staffed in 1998, the ACB has thus far brought forward a small number of high-level cases, including cases against a former Minister of Transport and Public Works (acquitted), the former Chief Executive Officer of the Petroleum Control Commission (sentenced to six years imprisonment), and the former Mayor of the City of Blantyre (who served a nine month sentence). The ACB has had difficulties in getting high-level cases prosecuted. Malawi's Law Commission recommended in 2002 that the ACB be authorized to prosecute cases directly, rather than through the politically appointed Director of Public Prosecutions (DPP). Legislation to that effect was drafted in 2003, but was not passed. Instead, a revision to the Corrupt Practices Act, which mandated the DPP to report to Parliament on any cases the DPP does not give consent to prosecute, was passed in 2004.

Soon after his first election win in 2004, President Bingu wa Mutharika stated that the fight against corruption was a priority. However, investigations and trials have moved at a slow pace. In 2008, high-profile cases that were brought to trial included a former cabinet minister and a CEO of the utility company. Former President Bakili Muluzi is currently facing corruption charges in court.

Malawi subscribes to the provisions of the OECD Antibribery Convention, but is not a signatory of the Convention. Malawi's Penal Code prohibits bribery. Giving or receiving a bribe—whether to or from a Malawian or foreign official—is a crime under Malawi’s penal code..

Anti-Corruption Resources

Some useful resources for individuals and companies regarding combating corruption in global markets include the following:

· Information about the U.S. Foreign Corrupt Practices Act (FCPA), including a “Lay-Person’s Guide to the FCPA” is available at the U.S. Department of Justice’s Website at: http://www.justice.gov/criminal/fraud/fcpa.

· Information about the OECD Antibribery Convention including links to national implementing legislation and country monitoring reports is available at: http://www.oecd.org/department/0,3355,en_2649_34859_1_1_1_1_1,00.html. See also new Antibribery Recommendation and Good Practice Guidance Annex for companies: http://www.oecd.org/dataoecd/11/40/44176910.pdf

· General information about anticorruption initiatives, such as the OECD Convention and the FCPA, including translations of the statute into several languages, is available at the Department of Commerce Office of the Chief Counsel for International Commerce Website: http://www.ogc.doc.gov/trans_anti_bribery.html.

· Transparency International (TI) publishes an annual Corruption Perceptions Index (CPI). The CPI measures the perceived level of public-sector corruption in 180 countries and territories around the world. The CPI is available at: http://www.transparency.org/policy_research/surveys_indices/cpi/2009. TI also publishes an annual Global Corruption Report which provides a systematic evaluation of the state of corruption around the world. It includes an in-depth analysis of a focal theme, a series of country reports that document major corruption related events and developments from all continents and an overview of the latest research findings on anti-corruption diagnostics and tools. See http://www.transparency.org/publications/gcr.

· The World Bank Institute publishes Worldwide Governance Indicators (WGI). These indicators assess six dimensions of governance in 212 countries, including Voice and Accountability, Political Stability and Absence of Violence, Government Effectiveness, Regulatory Quality, Rule of Law and Control of Corruption. See http://info.worldbank.org/governance/wgi/sc_country.asp. The World Bank Business Environment and Enterprise Performance Surveys may also be of interest and are available at: http://go.worldbank.org/RQQXYJ6210.

· The World Economic Forum publishes the Global Enabling Trade Report, which presents the rankings of the Enabling Trade Index, and includes an assessment of the transparency of border administration (focused on bribe payments and corruption) and a separate segment on corruption and the regulatory environment. See http://www.weforum.org/en/initiatives/gcp/GlobalEnablingTradeReport/index.htm.

· Additional country information related to corruption can be found in the U.S. State Department’s annual Human Rights Report available at http://www.state.gov/g/drl/rls/hrrpt/.

· Global Integrity, a nonprofit organization, publishes its annual Global Integrity Report, which provides indicators for 92 countries with respect to governance and anti-corruption. The report highlights the strengths and weaknesses of national level anti-corruption systems. The report is available at: http://report.globalintegrity.org/.

· The website for the Malawi Anti-Corruption Bureau is: http://www.anti-corruptionbureau.mw

Bilateral Investment Agreements

Malawi's policy is to negotiate bilateral investment treaties with countries whose nationals opt to invest in Malawi. The country is a party to a number of multilateral, regional and bilateral trade agreements, offering wider access and preferential treatment for the export of Malawian products. These agreements are already being utilized. The multilateral and regional trade agreements include:

· Common Market for Eastern and Southern Africa (COMESA): COMESA has a potential market of 430 million people and a combined GDP of US$472 billion. Member states within the COMESA have continued to take steps to consolidate the Free Trade Area in preparation for the forthcoming transition of the COMESA Free Trade Area into a Customs Union. A customs union was launched on June 7, 2009. COMESA has signed a Trade and Investment Framework Agreement (TIFA) with the United States.

· Southern African Development Community (SADC): The SADC region has a potential market of 258 million people and a combined GDP of US$471.1 billion. Under SADC, Malawi is committed to reducing tariffs on intra-SADC trade progressively. Tariff reductions for all member states (except for DRC and Angola) started in January 2000. SADC was to have achieved Free Trade Area status on January 1, 2008, but as of January 2011 few countries had completed their tariff phase downs, and some—including Malawi—had not yet started.

· The COMESA-EAC-SADC Tripartite: A Second Tripartite Summit took place on June 12, 2011, in Sandton, South Africa. The Summit formally launched the negotiations for a COMESA-EAC-SADC Tripartite Free Trade Area. The COMESA-EAC-SADC countries have a combined GDP of about US$624 billion and a population of over 527 million people.

· African Growth Opportunities Act (AGOA): AGOA offers duty and quota-free access to the United States market of 312 million people for 1,800 products, in addition to the standard Generalized System of Preferences (GSP) program.

· Everything But Arms (EBA): This initiative extends duty-and quota-free access to the European Union market for all imports from Least Developed Countries, except arms. Minor variations apply to bananas, sugar, and rice. Full liberalization took place for these commodities in 2009.

Bilateral trade agreements exist with South Africa, Zimbabwe, and Mozambique, and a customs agreement is in place with Botswana. In addition, trade agreements are currently under consideration with Zambia and Tanzania. These offer considerable opportunities for increased trade and investment.

High transportation costs make the immediate neighbors (Tanzania, Mozambique, Zambia, Zimbabwe, etc.) critical markets for Malawi.

Malawi acceded to the Multilateral Investment Guarantee Agency (MIGA) in 1985/86. Malawi has not renewed several investment treaties that lapsed after 1986, since MIGA provides mechanisms for the settlement of investment disputes. Malawi also signed investment promotion and protection agreements (IPPAs) with the OPEC Fund for International Development, Libya, Italy, Netherlands and Zimbabwe.

OPIC and Other Investment Insurance Programs

Malawi has had an OPIC investment guarantee agreement since 1967. In August 1999 the U.S. Export-Import Bank included Malawi under its new Africa Short-term Export Credit Insurance Program.

Labor

The Government of Malawi estimates that more than half of the population is of working age. Unskilled labor is plentiful. Skilled and semi-skilled labor is scarce. Occupational categories with skills shortages include accountants and related personnel, economists, engineers, primary and secondary school teachers, lawyers, and medical/health personnel. The University of Malawi provides bachelors and masters degrees in economics, engineering, medicine, education, agriculture and administration. The Malawi College of Accountancy teaches accounting. Chancellor College operates the country's law school. In early 1999, the government established the Technical, Entrepreneurial and Vocational Education and Training Authority (TEVETA) program to address technical skills shortages in industry.

The Labor Relations Act (LRA), enacted in 1997, governs labor-relations management in Malawi. The Act allows strikes and lockouts for registered workers and employers after dispute settlement procedures in collective agreements and conciliation have failed. As trade union rights have existed only since the transition to multiparty democracy in 1994, industrial relations are still evolving. Employers, labor unions, and the government lack sufficient knowledge of their legitimate roles in labor relations/disputes.

Workers have the legal right to form and join trade unions. Twenty-nine unions are registered. Union membership is low, however, given the small percentage of the work force in the formal sector, the lack of awareness of worker rights and benefits, and a resistance on the part of many employees to join unions. Only 18% of people employed in the formal sector belong to unions. Unions may form or join federations and have the right to affiliate with and participate in the affairs of international workers' organizations. While the government is a signatory to the ILO Convention protecting worker rights, mechanisms for enforcing the provisions of the convention are weak. There are serious manpower shortages at the Ministry of Labor, resulting in very few labor-standards inspections.

Foreign Trade Zones/Free Trade Zones

Legislation for the establishment of export processing zones (EPZs) came into force in 1995. All companies engaged exclusively in manufacture for export may apply for EPZ status. As of December 2011, 16 were operating under the EPZ scheme. Almost all these companies are foreign owned companies though the law does not discriminate on ownership. A Manufacturing Under Bond (MUB) scheme offers slightly less attractive incentives to companies that export some, but not all, of their products. Thus most investors prefer to operate under EPZ arrangement. Recent changes in the governments 2011/2012 national budget remove some of the most significant incentives for investing in EPZs.

Foreign Direct Investment Statistics

Malawi is one of the least developed and most densely populated countries in the world. Malawi’s economy is based on agriculture which accounts for over 30% of GDP and 90% of export revenues. Small shareholder agriculture is the source of income for more than 80% of population. Malawi's economy depends on substantial inflows of foreign aid from the IMF, the World Bank, and individual donor nations.

Both the Reserve Bank of Malawi (RBM) and the Malawi Investment and Trade Center (MITC) maintain records on the value and composition of Foreign Direct Investment (FDI) in Malawi. Neither the RBM nor MITC, however, currently capture actual FDI figures. The following chart shows the amount of FDI into Malawi since 2005 as well as its relative percentage of the GDP for that year

Year

FDI Inflows (US$)

% GDP

2005

52,327,161

1.8

2006

72,192,866

2.3

2007

92,055,126

2.6

2008

170,027,937

4.0

2009

60,447,137

1.2

2010

140,000,000

2.7

Source: Source International Monetary Fund, International Financial Statistics and Balance of Payments databases, and World Bank, Global Development Finance.

Foreign direct investment (FDI) from 2005 to 2009 ranged from 1.2 to 4.0% of GDP, and dropped to 2.74% of GDP in 2010. The prospect for future FDI is linked to the government’s implementation of its currency devaluation plans and further improvement on economic governance programs. The government failed to honor its own commitment made under its Extended Credit Facility (ECF) program with the International Monetary Fund (IMF) that sought to establish a competitive and market clearing exchange rate by the end of 2011. Malawi has been declared off-track on the IMF’s ECF program since May 2011.

Web Resources

Government of Malawi: http://www.malawi.gov.mw

Reserve Bank of Malawi: http://www.rbm.mw

Malawi Stock Exchange: http://www.mse.co.mw

National Statistical Office: http://www.nso.malawi.net

Privatization Commission: http://www.privatisationmalawi.org

Copyright Society of Malawi: http://www.cosoma.org

African Regional Intellectual Property Organization: http://www.aripo.org

Department of Commerce, Foreign Commercial Service: www.trade.gov/cs

Department of Commerce, Trade Compliance Center: tcc.export.gov/ReportaBarrier/index.asp

Department of Commerce, Office of the Chief Counsel for International Commerce: http://www.ogc.doc.gov/trans_anti_bribery.html

United States Trade Representative, Trade Agreements: http://www.ustr.gov/trade-agreements/free-trade-agreements

Department of Justice, Fraud Section: www.justice.gov/criminal/fraud/fcpa

Corruption Resources

Malawi Anti-Corruption Bureau: http://www.anti-corruptionbureau.mw

Department of Justice, Foreign Corrupt Practices Act: http://www.justice.gov/criminal/fraud/fcpa

Department of Justice, FCPA Lay-Person’s Guide: http://www.justice.gov/criminal/fraud/docs/dojdocb.html

Department of Commerce, Office of the General Counsel, Transparency and Anti-Bribery Initiatives: http://www.ogc.doc.gov/trans_anti_bribery.html

United Nations Anticorruption Convention: http://www.unodc.org/unodc/en/treaties/CAC/signatories.html

OECD Anti-Bribery Convention: http://www.oecd.org/department/0,3355,en_2649_34859_1_1_1_1_1,00.html

OECD Antibribery Recommendation and Good Practice Guidance Annex: http://www.oecd.org/dataoecd/11/40/44176910.pdf

Transparency International, Corruption Perceptions Index: http://www.transparency.org/policy_research/surveys_indices/cpi/2009

Transparency International Global Corruption Report: http://www.transparency.org/publications/gcr

World Bank Institute, Worldwide Governance Indicators: http://info.worldbank.org/governance/wgi/sc_country.asp

World Bank, Business Environment and Enterprise Performance Surveys: http://go.worldbank.org/RQQXYJ6210

World Economic Forum, Global Enabling Trade Report: http://www.weforum.org/en/initiatives/gcp/GlobalEnablingTradeReport/index.htm

Department of State, Human Rights Report: http://www.state.gov/g/drl/rls/hrrpt

Global Integrity, Global Integrity Report: http://report.globalintegrity.org



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