Ambassador Palmer Speaks to ICAM

This is my first public speech in Malawi. I wanted to make it here with you for a number of reasons. First is that 30-some years ago, I fell in love with a Southern African accountant (now my husband) so I’ve known for many years what ooplung is (off the books money, for those of you not familiar with the lingo) and the importance of the work you do. Second, I was drawn to the topic – “Driving Economic Growth: Optimizing Economic Opportunities.” Finally, and most importantly, ICAM members are the engines of Malawi’s future prosperity. So I really am honored to be here with you to talk about Malawi’s enormous potential and the challenges to realizing it.

I thought I would be as prescriptive as I could be – so this may be my first and last speech in Malawi!  I say these things as someone who cares deeply about Malawi, its partnership with the United States and its future prosperity, but with humility, knowing that I am an outsider and one relatively new to Malawi at that.  I’m not going to tell you things you don’t already know, but I hope it might be helpful to have an outsider say them publicly.  I also hope that potential investors from the United States will read this on the Embassy’s website and learn about Malawi’s great potential and what the American government is doing to try to help you realize it.

So to sing for my supper:  What are economic drivers?  Or, put another way, what key ingredients are investors – foreign and domestic – looking for when they assess whether to invest in Malawi.  I think there are primarily five:

1)    Predictability – of government policy, exchange rates, independent courts, predictable and transparent tax regimes, and sanctity of contracts

2)   Availability of raw materials

3)   Availability of skilled labor

4)   Access to capital; and

5)   Access to markets, including transportation networks and ease of exports

Malawi does very well in many of these areas:

  • Although there are some issues of court shopping and backlogs, Malawi’s courts have a well-deserved reputation for fairness.
  • The Malawi Revenue Authority’s modernization program, including  the introduction of electronic fiscal devices, has helped level the playing field.  The Commissioner General has taken some bold steps to ensure personal and professional integrity among officers of all ranks.
  • With the PTA currency swap of last year and sound Reserve Bank of Malawi policies, it appears that the wild currency fluctuations of the recent past are behind us.  If the government sticks to its current budget – and Public Financial Management Reform program (more on that later) – inflation, too, will continue to decrease.

But challenges remain in other areas…….particularly:

  • turning the agricultural sector into an economic driver;
  • improving access to capital and energy;
  • skilled labor;
  • access to markets; and
  • accountability in general.

In Malawi, we can’t talk about Optimizing Economic Opportunities without talking about the agriculture sector.  We need to get the agricultural sector moving before the rest of the economy – agro-processing, manufacturing, everything else – can really get moving.  Close to 90% of Malawians work in agriculture, but the sector produces only 30% of GDP.  Globally, yields have increased sharply — for example, global cereals yields increased almost 2 percent each over the past sixty years.  But with the exception of some marginal gains in maize production, yields have remained stagnant here in Malawi. The fact of the matter is that Malawi is yet to benefit from an agricultural productivity revolution.   We need improvements in land use and in biotechnology – so that Malawi’s growing population can produce more efficiently on ever shrinking agricultural land.

Many policies in Malawi approach agriculture as a social welfare sector, rather than an engine of private sector-led growth that can create jobs and reduce poverty. What do I mean by that? Low farm gate prices mean farmers are not earning the full value of their efforts or a fair price for the crops they produce. Too often, low farm gate prices result from government policies like export bans and other price stabilization policies, as we saw during the last election cycle.

Such policies are usually justified in terms of promoting low prices for consumers or domestic value addition – a commendable goal – and they may keep prices low initially, but these interventions are costly for government to maintain and ultimately hurt the smallholder farmer and decrease revenue the country could otherwise collect.  Frequent government intervention in markets has also caused Malawi to have the most volatile food prices in eastern and southern Africa, which is not good for consumers or for industry.  Studies have shown that in the long run, such policies are counterproductive. When farmers don’t profit, they don’t produce. So I applaud the government for lifting both the export bans and the export license requirement on soya, and I urge it to consider doing so for other crops as well. The bottom line is that all over the world, poverty reduction really occurs when farmers get decent prices for their produce.

The New Alliance for Food Security and Nutrition, which Malawi joined in 2013, brings government, the private sector, and development partners together to accelerate agricultural investment and growth. Malawi has made 16 specific policy commitments, including passing the Land Bill, the new Seed Act, removing export bans and trade barriers, as well as expanding access to irrigation.  These reforms could make a major improvement in the investment climate for agriculture.  Through USAID, the United States is supporting this by funding two senior policy advisers in the Ministry of Agriculture, to assist government in implementing these changes.  I hope that President Mutharika’s selection to serve on the New Alliance Leadership Council will accelerate Malawi’s progress in supporting greater private investment in the sector.

Lack of access to finance inhibits both agriculture and manufacturing investment.  Prudent macro-economic policies are crucial.  Government borrowing soaks up excess capital and drives up interest rates.  The reduction in the cost of the FISP in the budget Finance Minister Gondwe just presented to Parliament, for example, is a good first step, but without sound fiscal policy – and full implementation of Public Financial Management Reform, inflation will continue and investors will continue to make short plays rather than investing for the long term.

Today, Malawi’s high interest rates – which are some of the highest on the continent – act as a brake on investment.  With reserve ratios high to protect against non-performing loans, lending rates stay high.  And, because banks have trouble liquidating the borrower’s collateral through the courts, bad loans stay on their books rather than getting written off.  One way to break this vicious cycle might be efforts to tie training and extension to loans to increase the borrower’s chances of success.  And just as high interest rates burden borrowers, so do short loan terms, which can be particularly difficult when companies are looking to invest.  As government implements public financial management reforms and confidence rebounds, Malawi could consider whether longer-term government debt instruments would be helpful in this regard, allowing commercial banks to match the terms of some of their assets and liabilities at longer maturities.

With agriculture and macro-economic policy on track, we can address the lack of a predictable, economical energy supply, a real brake on development.  Today, fewer than one in ten Malawians have access to the national electricity grid. Malawi needs between 500 and 1000 additional megawatts over the next five years just to keep up with demand projections. The truth of the matter is that the government doesn’t have the capital to make these investments. So private sector investment in new electricity generation is both critical, and a great growth opportunity. And by getting power to those who need it, we can unlock growth in a number of other sectors, like mining, manufacturing, and information and communications technology.

I’m proud that the U.S. Government, through the Millennium Challenge Corporation, is investing $350 million in Malawi over the next five years, $150 million this calendar year alone – to increase power generation and improve transmission.  The MCC is also helping the government to reform Malawi’s power sector to make it more attractive to private investment while helping to strengthen ESCOM and energy regulator MERA.   I applaud His Excellency, President Mutharika, for his interest in reforming Malawi’s power sector to promote investment, and the commitment he and his government are showing to do so.

By helping MERA understand the true cost of a kilowatt of electricity here in Malawi, and urging that electricity tariffs reflect that cost, we improve the climate for investment in the critical power sector.  By working with ESCOM to improve its internal operations, we’re ensuring that the company remains creditworthy so investors will sign power purchase agreements worth millions of dollars with ESCOM and Government won’t have to provide costly guarantees.

I want to stress that having a Millenium Challenge Corporation Compact is a very big deal.  Apart from the $350 million we’ll spend, the Compact signifies that a country governs well on behalf of its people.  There are 20 independent indicators – determined internationally by groups like Freedom House and the UN – that a country must pass to be eligible for a Compact.  Malawi has one of only ten active Compacts in the world.  I’m delighted that there will be an MCC Energy Trade and Investment delegation to Malawi next week. I hope this marks the start of greater trade and investment activity in Malawi by American firms.

In Malawi, access to raw materials is both a huge economic driver and a potential challenge. Sound natural resource management is important in any context, but in few countries is it as closely linked to economic growth as it is in Malawi.  In some areas, forests provide thirty percent or more of average household income.  Fish from your beautiful lake are the most important source of animal protein in Malawi and support nearly 500,000 people’s livelihoods. But these livelihoods and sources of economic growth are under threat from the combined impacts of a population growth, poor resource management, and climate change.

According to one analysis, unsustainable resource use costs Malawi about $190 million annually, or nearly five percent of GDP. Extreme weather events such as the torrential rains that occurred earlier this year are becoming more common and the flooding that ensued is estimated to have resulted in more than $400 million in damage. Deforestation exacerbates food insecurity: it hastens soil erosion. It forces women to spend more and more of their time gathering fuel wood in increasingly far-flung locations. The growing trade in illegal wildlife that has decimated Malawi’s elephant population has a clear negative effect on tourism, dampening its potential as a growth driver. I’ve said it before, but I think it bears repeating:  the time to take courageous action to protect Malawi’s precious natural resources — from moving communities to higher ground, to stopping illicit logging and charcoal sales is now – while the memory of the devastation of this year’s floods is fresh in our minds.

Access to skilled labor is as important as access to materials. The U.S. is investing in early grade literacy across Malawi so that Malawian students learn to read and can read to learn.  I salute the government’s efforts to establish community colleges and support student loans to help more Malawian students realize their dream of a university education.  I urge all of you to establish internships to expose young Malawians to good business practices. And – here’s an advertisement – I hope all of you will encourage your brightest young employees to apply for the Young African Leaders Program to travel to the United States and meet young business, government and civil society leaders from across my country and the continent.

I’d also like to talk about two areas I see not so much as challenges but as potential growth areas: women in development, and trade facilitation and regional markets.

Malawi ranks 160 out of 174 on the UN’s gender inequality index. An 18 year old Malawian girl is 50 times more likely to be married and pregnant than she is to be in university.  This needs to change; not just because it’s the right thing to do, but because Malawi will be more prosperous if it does. Overall productivity will increase if the skills and talents of Malawi’s women and girls are used more fully. For example, the Food and Agricultural Organization has shown that if women farmers have the same access as men to productive resources such as land and fertilizers, agricultural output could increase by as much as 4 percent (FAO, 2011). Elimination of barriers against women working in certain sectors or occupations could increase output by as much as 25 percent.

Access to markets was my fifth driver of economic growth/decision point for investors. As I was gearing up to come to Malawi, CNBC ran a story entitled “The World’s Fastest Growing Consumer Market…….Isn’t China.”  It was Malawi!  My relatives and former bosses sent me copies of the article from all over the world. Admittedly, you’re starting from a fairly low base, but Euromonitor found that consumer spending in Malawi was set to grow 18.2 percent year-on-year in 2014.  But even with those impressive numbers, what Malawi really needs to attract additional trade and investment dollars is a larger market – a Southern African market, or because of its unique location, additional access to the East African market. Malawi’s market of 17 million may be attractive, but the close to 300 million people in SADC are an even more enticing market.  With regional transportation links improving every day, Malawi can be a base for companies to access the SADC market – as long as exporting from Malawi to SADC countries is straightforward.  President Mutharika is poised to sign a tripartite trade agreement with SADC, the EAC, and COMESA in Sharm el Sheikh next month that will begin this process, and I encourage the government to move quickly to implement both existing trade harmonization commitments and new ones that arise from this exciting tripartite agreement.

USAID, through the Southern Africa Trade Hub, is helping Malawi implement regional trade facilitation in a number of ways. The Trade Hub has helped Malawi rationalize the number of agencies present at the border and assisted the Malawi Bureau of Standards to set up the National Enquiry Point for businesses to get information about technical barriers to trade in Malawi and its trading partners. And they are helping implement the National Single Window – a single computer-based interface for businesses to submit all of the forms that today go to so many agencies, in so many paper copies, before a shipment can cross the border.  This both speeds up the process and eliminates opportunities for rent seeking. I saw firsthand the impact that increased regional trade can have on a developing economy when I served in Vietnam. ASEAN countries have experienced very rapid economic growth over the last decade, in large part because 25-30% of their trade is intra-regional – fully 37% if you add their big neighbor, China. In contrast, less than 15% of SADC countries trade is with the region, the bulk of which is with South Africa.

Finally, I believe transparency and accountability drive investors’ decisions, too. They are not just a matter of personal and professional integrity: they are also an economic imperative. World Bank research shows that where corruption thrives, fair competition is undermined, and new businesses with new products and ideas never get to market. The effects of corruption are particularly damaging to small and medium-sized enterprises – the very group Malawi is counting on to create jobs and drive growth.

Public Sector  Reform and its brother Public Financial Management Reform, therefore, are fundamental to the success of everything else I’ve talked about.  If these programs are fully implemented, so that government operations and expenditures are more transparent, budgets are adhered to and audits have consequences; if they achieve as the President has said “a change in mind set” in politicians, civil servants and ordinary Malawians so that citizens understand their rights and the government does truly [in the words of Malawi’s constitution], serve the people; then Malawi’s full potential will be unlocked. Just as accountants and auditors in the private sector ensure the reliability of their companies’ books to enable senior management to make well-informed strategic decisions, when those working in the public sector and civil society shed light on how public funds are used, they similarly help decisionmakers focus on delivering critical services. All of you as ICAM members should be proud of the role you play – for your firms and for your nation.

I am thrilled to be here in Malawi now. I believe: that if Public Sector Reforms are fully implemented; that if there is a change in mind set, so that all government officials understand  their first responsibility is to serve the people of Malawi, and that the citizens of Malawi understand the obligations of that citizenship, that investors – domestic and international – will start bringing their money to the table, creating jobs and prosperity and I will say “I lived in Malawi when Malawi turned a corner.” Then Malawi will be not just the Warm Heart of Africa, but the Bright Heart of Africa that offers a bright future for all its citizens.