Identifier
Created
Classification
Origin
04LILONGWE1175
2004-12-30 13:50:00
UNCLASSIFIED
Embassy Lilongwe
Cable title:  

MALAWI INVESTMENT CLIMATE STATEMENT, 2005

Tags:  KTDB EINV EFIN ETRD ELAB PGOV OPIC USTR BUD FIN 
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UNCLAS SECTION 01 OF 07 LILONGWE 001175 

SIPDIS

STATE FOR EB/IFD/OIA
JOHANNESBURG FOR FCS

E.O. 12958: N/A
TAGS: KTDB EINV EFIN ETRD ELAB PGOV OPIC USTR BUD FIN
SUBJECT: MALAWI INVESTMENT CLIMATE STATEMENT, 2005

REF: SECSTATE 25036

Investment Climate Statement - Malawi 2005
--------------------------------------------- ---------------
----------------

UNCLAS SECTION 01 OF 07 LILONGWE 001175

SIPDIS

STATE FOR EB/IFD/OIA
JOHANNESBURG FOR FCS

E.O. 12958: N/A
TAGS: KTDB EINV EFIN ETRD ELAB PGOV OPIC USTR BUD FIN
SUBJECT: MALAWI INVESTMENT CLIMATE STATEMENT, 2005

REF: SECSTATE 25036

Investment Climate Statement - Malawi 2005
-------------- --------------
--------------


1. Openness to Foreign Investment


A. The Government encourages both domestic and foreign
investment in most sectors of the economy, without
restrictions on ownership, size of investment, source of
funds, and destination of final product. The Competition
And Fair Trading Act -- passed by Parliament in November
1998 but made operational in April 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.
The Act calls for the formation of a commission that will
approve only those acquisitions, mergers or takeovers that
increase employment and net exports, and lower prices for
consumers. During the first half of 2000 the U.S.-based FCA
Investment Company, together with the two local companies,
acquired about 63% shares in the National Insurance Company
of Malawi (NICO) through a cash takeover. Ministry of Trade
and Private Sector Development is in the process of
appointing competition Commissioners who will later set up a
secretariat to oversee implementation of the Competition and

SIPDIS
Fair Trading Act.


B. 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 impede investment, 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;
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.


C. As of December 2004, Malawi had privatized 61 units of
approximately 110 state-owned enterprises targeted for
privatization, generating about MK 1.0 billion (about USD
9.2 million). 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%. The
Privatization Act also prohibits members of the Cabinet, or
employees of the Privatization Commission or its
consultants, to participate in any divestiture except where
an offer is made to the general public. Malawian nationals
are offered preferential treatment, including discounted
share prices and subsidized credit. Since July 2000, the
maximum subsidized credit amount has been increased from
20,000 Malawi Kwacha (MK) (about 184 USD) to MK 50,000
(about 459 USD) and the minimum income threshold of MK
10,000 per month (about 92 USD) was removed. Subsidized
credit carries a precondition that the shares or assets be
retained for at least two years.


2. Conversion and Transfer Policies


A. 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. Businesspeople report no major problems with
foreign currency remittances. Traditionally, foreign
exchange availability follows the agricultural cycle in
Malawi. It is plentiful from April through September (when
tobacco sales generate foreign exchange inflows),and scarce
from October through March. During periods of scarcity,
investors may not have immediate access to foreign exchange.
As of December 2004, official foreign reserves equaled
approximately 2.0 months of import cover. Non official
reserves totaled 1.2 months of import cover.

3. Expropriation and Compensation

A. 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 expropriatory actions has
been extremely remote since the repeal of the forfeiture act
in 1992. 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 MSE-listed companies requiring significant technical
and financial resources.


B. 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 is
being prepared, and the new law will likely incorporate 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.) As of July 2000, the Malawi Government
stopped issuing freehold land.


C. 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,
Physical Planning, and Surveys remains the final judge.
Most land in Malawi is leasehold.


4. Dispute Settlement


A. Malawi has an independent but overburdened judiciary,
which derives its procedures from English Common Law. There
has been little government interference in the court system,
although there have on occasion been allegations of
government involvement -- largely through public comments
made by politicians on certain cases. There are also
frequent allegations of bribery in civil and criminal cases.
Administration of the courts is weak, and due process can be
very slow. Serious shortcomings in the judicial system
include poor record keeping, a lack of attorneys and trained
personnel, heavy caseloads, and insufficient financial
resources.


B. The court system in Malawi accepts and enforces foreign
court judgments that are registered in accordance with
established legal procedure. There are, however, reciprocal
agreements among Commonwealth countries to enforce judgments
without this registration obligation. There is no such
agreement between Malawi and the United States.


C. 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, and the Competition and Fair
Trading Act cover commercial practices. The first two Acts
have been consistently applied, and there is a track record
of cases involving commercial law. 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.


D. 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 investment disputes
involving U.S. Companies since 1996.


5. Performance Requirements/Incentives


A. Malawi is not in compliance with WTO Trade Related
Investment Measures (TRIM) notification requirements.
However, 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 promotion zone (EPZ) status only to firms (foreign or
domestic) that produce exclusively for export.


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

- a corporate tax rate of 35%
- the following tax allowances:
-- 40% for new buildings and machinery
-- up to 20% for used buildings and machinery
-- 100% deduction for manufacturing company operating
expenses in 2 years prior to start of business
-- no withholding tax on dividends;
-- no import duty on raw materials for manufacturing
industry (N.B. This policy is being implemented at the
discretion of the Customs and Excise Department. Several
manufacturers have recently complained of delays and denial
of this incentive.)
-- no import duty on computer equipment and accessories
-- tax holidays or reduced corporate tax for some new
investments
-- a maximum import tariff rate of 25%


C. Malawi offers the following special incentives for
exporters:

- for exporters in EPZs:
-- no corporate tax, value added tax, or withholding tax
on dividends
-- no import duty on capital equipment and raw materials;
and
-- no excise taxes on local purchases of raw materials and
packaging

- for industries manufacturing in bond:
-- an allowance of 12% of export revenues for products
other than tobacco, tea, sugar and coffee
-- transport allowance of 25% of all international
transport costs
-- no import duties on capital equipment
-- no import duties or surtaxes on raw materials
-- no excise tax on local purchases of raw materials and
packaging material


D. The above incentives are applied consistently. Foreign
investors are generally accorded national treatment. 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
books of accounts, address of the company secretary, and
names of directors and shareholders.


E. 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).


F. The government issued a revised "Policy Statement and
New Guidelines for The Issuance and Renewal of [Expatriate]
Employment Permits" (one document) in November 1998. The
guidelines state that investors may employ expatriate
personnel in areas where there is a shortage of "suitable
and qualified" Malawians. They underscored the government's
desire to make TEPs readily available to expatriates, and
mandated that processing times for TEP applications shall
not exceed 40 working days. The 1998 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 life-span of the organization; and;
- 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.


G. 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 amount of investment, status of
applicant (investor, retiree, student, spouse of a Malawi
citizen) and period of business assignment. The maximum
number of resident permits per organization is five, with
the actual number allowed dependent on the amount of
investment.


6. 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. Public enterprises compete equally with
private entities with respect to access to markets, credit
and other business operations.


7. Protection of Property Rights


A. Both foreign and domestic investors have access to
Malawi's legal system, which functions fairly well, albeit
slowly. 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.


B. 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 Commerce and
Industry (MCI) -- coordinator of WTO issues in Malawi -- has
limited capacity to effectively track WTO developments. The
MCI is working with COSOMA and the Registrar General to
align relevant domestic legislation with the WTO TRIPs
agreement with technical assistance from the Africa Regional
Intellectual Property Organization (ARIPO).


8. Transparency of the Regulatory System


A. Malawi's industrial and trade reform program --
including rationalization of the tax system, liberalization
of the foreign exchange regime, and elimination of trade and
industrial licenses on 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, red tape, and corrupt practices continue
to impede the business and investment approval process.
These include decision making, which is often neither
transparent nor based purely on merit, and required land-
access approvals. While market prices for goods are
generally not controlled, prices of certain other goods --
sugar, maize, petroleum products, and state-provided
utilities -- are regulated.


B. There have been positive steps towards increasing
regulatory transparency and improving the foreign investment
environment. These developments include: establishment of
the National Electricity Council in October 1998; the
establishment of the Malawi Communication Regulatory
Authority (MACRA) in May 1999; the licensing and operation
of a second cellular phone service provider in 1999; and the
splitting of the former Malawi Posts and Telecommunication
Corporation (MPTC) into the Malawi Posts Corporation (MPC)
and Malawi Telecommunications Limited (MTL) as separate
entities in May 2000. The state-owned Petroleum Control
Commission (PCC) relinquished its monopoly on petroleum
imports in May 2000, allowing the private sector to import
80% of Malawi's fuel. PCC now has a largely regulatory
function within the petroleum sector.

9. Efficient Capital Markets and Portfolio Investment

A. The Reserve Bank of Malawi pursues a tight monetary
policy, though a legacy of fiscal indiscipline continues to
exert pressure on money supply. In 2001, growth in money
supply (m2) was 21.2%. M2 growth was 25.2% in 2002 and
29.3% in 2003. The new government elected in May 2004 has
embarked on a program of expenditure control and reduction
in new domestic borrowing.


B. With the tighter monetary policy, headline inflation
dropped from 33.7% in January 2001 to 9% in May 2003. It
has since crept up again, and was at 12% in October 2004.
Reserve Bank discount rates were reduced from 35% to 25% in

2004. However, excessive government spending has continued
to put inflationary pressure on the economy. As of end
November 2004, the kwacha was trading at approximately 109
to the dollar.


C. 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.


D. Malawi has a sound banking sector, overseen and well
regulated by the Reserve Bank of Malawi -- its central bank.
There are six full-service commercial banks: First Merchant
Bank Limited; Finance Bank of Malawi; Indefinance; National
Bank of Malawi (NBM); Nedbank; Stanbic Bank (SB) and Loita
Investment Bank. Other financial institutions are:
Investment and Development Bank of Malawi (INDEBANK);
Investment and Development Fund of Malawi (INDEFUND); the
Malawi Development Corporation (MDC); Finance Corporation of
Malawi (Fincom); Leasing and Finance Company of Malawi
(LFC); Malawi Savings Bank (MSB); the New Building Society
(NBS); the NBS Bank; the Malawi Rural Finance Company
(MRFC),Continental Discount House, and First Discount
House.


E. NBM and SB, which operate on a commercial, for-profit
basis, have dominated Malawi's commercial banking sector for
the past 30 years. As of December 2003, these banks
controlled over 80% of the market. Market shares for the
remaining banks were as follows: FMB, 6.4%; FBM, 3.8%; and
Indefinance, 2.2%.


F. The structure of the Malawi banking sector changed
significantly in 2001 with the privatization of the Stanbic
Bank (SB). Standard Bank of South Africa completed its
purchase of 60% of SB in December 2001 as part of the
privatization program. The conglomerate Press Corporation
Limited (PCL),in which the government holds a 49% stake,
sold out of SB but increased its holdings in rival National
Bank of Malawi (NBM). PCL now owns 50.1% of NBM.


G. The Companies Act, the Capital Market Development Act
(1990),and the Capital Market Development Regulations
(1992) provide the legislative and regulatory framework for
the encouragement and facilitation of portfolio 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).


H. Stockbrokers Malawi Limited (SML) is the major
registered stockbroker in Malawi. SML ran the MSE under a
three-year contract with the RBM until April 1, 2000, when
the two split to assume separate roles of broker and
regulator, respectively. Two new brokerage firms,
Continental Discount House and First Discount House, began
operations in 2001 and 2002, respectively. The MSE remains
regulated by the Stock Exchange Commission.


I. 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 nine
companies are listed on the MSE: NICO, Blantyre Hotels
Limited (BHL),Sugar Corporation of Malawi (SUCOMA),Stanbic
Bank ( Malawi) Packaging Industries of Malawi (PIM),Press
Corporation Limited (PCL),Old Mutual, Sunbird and National
Bank of Malawi (NBM). As at December 17, 2004, 6.716
billion shares were in issue on the MSE, and the market
capitalization was MK 745.186 billion (USD 6.84 billion).
Other potential companies for listing on the SME include
Bata Shoe Company, Leopard Match Company Limited, Malawi
Insurance Brokers Limited, Manica Freight Services Limited
and Bain Hogg Insurance Limited. Malawi and other SADC
markets are taking steps to harmonize listing requirements
through the SADC stock exchange co-operation initiative.


J. The MSE's development is still in its nascent stage, and
hostile takeovers have not yet occurred. Apart from the
restrictions under the privatization program, the U.S.
Embassy in Malawi is not aware of any 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 will not cover the day-to-
day trading on the MSE, but will regulate mergers,
acquisitions, and takeovers that are of national interest.


10. Political Violence


A. Malawi has been largely free of political violence since
gaining independence in 1964. Apart from the disarming of
the paramilitary group, the Malawi Young Pioneers, incidents
of violence associated with Malawi's 1994 transition to
democracy were few. Sporadic incidents of violence occurred
at political rallies in late 1998. The 1999 presidential
and parliamentary election campaigns were largely free of
political violence, but there were limited incidents of post-
election violence (primarily small-scale property damage) in
June 1999 and in by-elections in Blantyre in June 2001.
Sporadic violence in the run-up to the 2004 elections, and
in the days immediately following the elections, also
occurred.


B. Incidents of labor unrest occasionally occur, but these
are usually tame affairs. There are, however, no nascent
insurrections, belligerent neighbors, or other politically
motivated activities of major concern to investors.


11. Corruption


A. There are serious incidences/allegations of corruption,
particularly in the area of customs and excise tax and
government procurement. The Corrupt Practices Act, revised
in 2004, provides the legal framework for combating
corruption in Malawi.


B. 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
number of high-level cases involving former cabinet-level
officials and senior members of the ruling party, among
others. During the presidency of Bakili Muluzi, the ACB
had difficulties getting cases prosecuted through the
politically appointed Director of Public Prosecutions; these
difficulties have in large part disappeared since the
election of President Bingu wa Mutharika in May 2004. The
new administration has brought a change of leadership to the
ACB and prioritized the prosecution of corrupt practices.


C. Malawi subscribes to the provisions of the OECD
Convention on Combating Bribery, but is not a signatory to
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 section 90 of
Malawi's penal code. Accordingly, bribes are not tax
deductible.


12. Bilateral Investment Agreements


A. Malawi's policy is to negotiate bilateral investment
treaties with countries whose nationals opt to invest in
Malawi. The United States-Malawi Double Taxation Agreement
from the colonial period was canceled by the United States
in 1983. To date, there is neither a bilateral investment
nor a taxation treaty. There have been no taxation issues
of concern to U.S. investors since 1996.


B. Malawi acceded to the Multilateral Investment Guarantee
Agency (MIGA) in 1985/86. Since MIGA provides mechanisms
for the settlement of investment disputes, Malawi has not
renewed several investment treaties that lapsed after 1986.
However, the United Kingdom, the Netherlands, Denmark, South
Africa, Norway, Sweden and Switzerland still maintain Double
Taxation Treaties with Malawi.



13. OPIC and Other 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.

14. Labor

A. The Government of Malawi estimates that more than half
of the population is of working age. Unskilled labor is
plentiful; skilled labor is scarce. Occupational categories
with skills shortages include accountants and related
personnel; economists; engineers; primary and secondary
school teachers; lawyers; and medical and 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 (TEVET) program to address technical
skills shortages in industry.


B. The Labor Relations Act (LRA) governs labor-relations
management in Malawi. It was signed into law in June 1996,
and entered into force on December 1, 1997. The Act allows
strikes and lockouts for registered workers and employers
after dispute settlement procedures in collective agreements
and conciliation have failed. As democracy and trade union
rights have existed only since 1994, industrial relations
are still evolving. Employers, labor unions, and government
generally lack sufficient knowledge of their legitimate
roles in labor relations/disputes.


C. Workers have the legal right to form and join trade
unions. As of November 2003, 26 unions were registered.
Union membership is low, however, given the small percentage
of the work force in the formal sector (about 12%),the lack
of awareness of worker rights and benefits, and a resistance
on the part of many employees to join unions. Only 13% 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 almost no labor-
standards inspections.


15. Foreign Trade Zones/Free Ports

Legislation for the establishment of export promotion zones
(EPZs) came into force in December 1995. All companies
engaged exclusively in manufacture for export may apply for
EPZ status. As of November 2004, Malawi had approved 21
firms for EPZ status, of which 17 were operational and four
had closed operations. A manufacturing under bond (MUB)
scheme offers slightly less attractive incentives to
companies that export some, but not all, of their
manufactures.

GILMOUR