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THE IMPACT OF ECONOMIC WOES ON BUSINESS IN MALAWI 5TH ALL INCLUSIVE STAKEHOLDERS CONFERENCE BLANTYRE, 18TH FEBRUARY, 2016 CHANCELLOR KAFERAPANJIRA 1 Introduction • The economy in which we are living is characterised by the following phenomena: • high interest rates, with commercial lending rates starting from 40 percent upwards. • RBM adjusted policy rate on 4th November, 2015 from 25 percent to 27 percent with a view to restricting credit especially as a result of over-borrowing by Government. • a depreciating Kwacha at around MK750 to One U.S. Dollar from around K480 in July 2015. • runaway inflation at 24.9 percent in January 2016, driven by food shortages and a depreciating currency, 2 Cont’d • a budget that is not able to provide basic public goods and services to citizens such as medicines in public hospitals • long outstanding arrears to the private sector, some of which have been repaid at a heavily discounted rate • These symptoms are a reflection of an economy in distress, and businesses have not been spared. • Consequently expected economic growth is estimated at 3 percent for 2015, less than a forecast of 5.4 percent and the desired 6 percent. • The impact of these vagaries on business can best be explained in the form of a chart as indicated overleaf. 3 1. Fiscal Budget Fiscal Policy 2. Budget inadequate due to inaction by govt on donor requirements. e.g. ATI Bill No funds for investment/ development 1. 2. 3. Working capital eroded overtime Some arrears settled at low discount rate Interest burden where Working Capital was borrowed Arrears are owed to Private Sector GOVERNMENT (Policies and Actions) Monetary Policy Government Borrowing No business for construction companies No private sector support infrastructure No Project or investment funding 1. Businesses are crowded out from the money market 2. Interest rates are pushed up 3. future tax burden (Mortgaging the future) High Interest rates therefore increased cost of capital for businesses thus driving their return into negative territory • • • Companies shrinking No business expansion No long term investment No business expansion Companies being liquidated by financial institutions 1. Reduced working capital availability 2. Investors scared away by anticipated future high tax rates 4 SUMMARY OF IMPACT • As can be seen, Government influences the economy principally in two ways - Fiscal Policy and Monetary Policy • We noted that prevailing fiscal policies have contributed to the current economic mess businesses are in; i.e. • Businesses have been deprived of what belongs to them through arrears owed by government and where the arrears have been settled, this has been done at a great loss to the businesses • Some businesses are suffocating under the heavy weight of very high interest rates on current obligations; while others are suffering from high interest on the money they borrowed to supply government which is still owing in the form of arrears; 5 Cont’d • Businesses are closing some of their operations and branches, especially construction companies, owing to lack of availability of work • Businesses are retrenching and/or reducing staff at a rate which cannot be matched, with a view to reducing the wage bill (i.e. costs) and this is resulting in increasing unemployment; • Businesses are relocating to nearby countries en masse – Mozambique, Zambia and Zimbabwe, where the business environment is more welcoming and governments are serious. 6 The Daily Times of 10 February, 2016 7 The Daily Times of 10 February, 2016…ESCOM Tariff Escalation 8 The Daily Times of 10 February, 2016.. Loadshedding Schedule 9