* Malawi can learn through the forced process of industrialisation in South Africa based on imports substitution under sanctions
* Industrial Development Corporation of South Africa was created to support the creation of industries for self reliance against sanctions
* MDC can play as a vehicle for industrial financing through direct lending and equity participation with international partners
By Duncan Mlanjira
South Africa-based seasoned economist, Chifipa Mhango has written to Malawi Government proposing that Malawi must put itself in sanction mode and revive the defunct Malawi Development Corporation (MDC) as a vehicle for industrial financing through direct lending and equity participation with international partners.
Mhango, who is Chief Economist and Director of Economic Research and Strategy for Don Consultancy Group in South Africa, is advocating for the creation of strategic investment just like what his host country did in fertilizer manufacturing as key lesson and area for Malawi.
In the article to Office of the President and Vice-President — copied to Principal Secretary to the Office of the President and Cabinet; Minister of Finance; Minister of Trade and Industry and the Malawi media, is sharing what Malawi can learn through the forced process of industrialisation in South Africa based on imports substitution under sanctions.
“It was during this time that the Industrial Development Corporation of South Africa was created to support the creation of industries in South Africa for self reliance against sanctions.
“The model of importing fertilizer in Malawi should be replaced by a key massive investment locally with participation of MDC and international partners,” said Chifipa, who is revered in his host country for his economic contributions there and has offered his thoughts on following the current mess on the alleged Fertilizer Gate scandal.
Chifipa, who has worked for Industrial Development Corporation of South Africa (IDC) for over 10 years, says that country’s statutory company “is a perfect link to addressing the mess that is occurring in Malawi and how we can have a long-term solution”.
“The history of the IDC is a lesson for development financing in Africa, for its diversified sectors of lending and also having not received any financial support from South African Government since 1958. In other words, it’s a self-sustaining development finance institution (DFI).
“South Africa, under the apartheid system was isolated for a long period, and even its colonial past made it difficult to trade and attract investment into the country.
“The country decided to embark on an import substitution program of industrialisation. Key to this was also the establishment of the IDC to support the financing of the major industrialisation projects by the then South African Government.
“The key sectors identified were agriculture, agro-processing, manufacturing, mining and construction. Crucial to the plan towards import substitution was the financing of the establishment of Sasol for oil, gas and chemicals such as fertilizer manufacturing etc.
“Then later came Foskor fertilizer manufacturer then the financing of Omnia and the steel manufacturing giant Iscor now called ArcelorMittal SA, also my former employer for almost 8 years, among other giants.
“It is also through the IDC of South Africa that Malawi Government — under Dr Kamuzu Banda — was granted a loan of R3 million for the construction of the Capital Hill in Lilongwe — the seat of Government.”
Chifipa maintains that South Africa saw it that the country still had to be developed despite the economic sanctions imposed on it by the world, thus the then Government made it clear that it had its own steel supply for construction projects (roads, rail, buildings, houses, industries etc), own fertilizer supply for self-sufficiency in food production, and oil and gas from Sasol for energy.
“I have chosen only these key segments for now as a lesson point for Malawi’s current case, as examples of strategic investments and self-reliance model of development. In short, under even the current South African law, these institutions mentioned above, are protected premises under the Key Strategic Points law, to which entry is through proper security checks.
“Till today, the Industrial Development Corporation has equity in these giants of the South African economy on behalf of the Government that it gets dividends annually, which has been ploughing back into the South African economy through other lending activities such as the Franchise i.e. the Nandoos, McDonalds etc being owned by even black South Africans.
Lessons for Malawi
“Malawi as a nation is still behind on the path towards industrialisation of the economy. The fact that its international trade position reflects a deficit for decades is a clear demonstration of this weakness.
“The country’s export basket remains in raw material or agricultural products such as tobacco, with no proper direction and sustainable implementation plans in place to changing this trend since independence in 1964.
“The country remains a net importer of most manufactured goods, with debt or donor dependence approach towards forex accumulation and tobacco, which is not sustainable model.
“On a lighter note, I would say let’s put Malawi on a sanction mode, to develop the key strategic investment for self- reliance. Although Malawi is classified as an agricultural based economy, some products within this sector are still being imported from countries such as South Africa, and these include potatoes, eggs among others.
“To make it worse, Malawi has not even developed the capacity to support even its own key sector of the economy i.e. agriculture with the creation of enough capacity to supply the nation with its own fertilizer, and situation that is worsening.
“The current scandal around the Fertilizer Gate and the challenges around the entire fertilizer subsidy should be an eye opener to the whole country.
Mhango stresses that “no country can have political stability under an environment of food insecurity. The reliance on importation of fertilizer is no longer a conducive model, especially with the politicisation of its distribution and inefficiencies in procurement and the governance model around identification of suppliers as the recent cases have exposed.”
Based on daily media stories and activities being reported through social media, and also based on economic data around Government spending patterns, Mhango believes that “it is very clear that if the country can deal with these elements drastically, inroads can be made towards progressing the industrial development of Malawi, through the mobilisation of the limited currently wasted financial resources”.
He thus maintains that based on the South Africa model, as a sister African country, the revival of MDC can be “a key Government vehicle to support the industrialisation and infrastructure development as a direct local lender and also equity participant in some key projects — with international private or public sector corporation — and with the right personnel managing it, and no political cohorts involvement, even at Board level”.
“Malawi Government should initiate a process (benchmark) to learn from the works of the IDC and partially The Development of Southern Africa (DBSA) in reinstitution of MDC as a matter of urgency.
“Several key growth sectors of the economy (greenfields and brownfields can be identified for mega lending). Currently, Malawi has too much so called DFIs that have become inefficient in operation and tarnished with scandals of political influence, with the right approach now being to consider amalgamating them, especially where there are duplication of mandates.”
He also proposes that Malawi should “as a matter of urgency have a short term implementation for the attraction of investment for fertilizer manufacturing plants, where MDC should be an equity partner, as that will soften the approach and willingness of an international partner, being a strategic raw material investment for the Agriculture sector”.
“The process to identifying the investment partner should also never be politicised, with preference being an already African established producer.
“Malawi is losing a lot of forex annually through the importation of fertilizer, and if current scandals in the procurement are to go by, then this is a matter of urgency as a strategic investment for the country.
“Malawi cannot continue under the current path in its fertilizer importation. The lessons of Foskor, Sasol Chemicals and Omnia Chemical Holdings in South Africa are close by for Malawi to ignore.
Key to this would be stabilisation of the electricity supply with more investments in already identified hydro-projects in the country,” said Mhango — who has also worked as chief economist at PetroSA; as chief research director and partner at Kwesthuba Consulting Ltd; as Director of research and strategy at Don Consulting Group as well as executive head of strategy, business planning and communication at Nedbank Ltd.
Malawi’s stand on MDC
Meanwhile, the Government announced in August of plans to revive MDC to promote what Minister of Finance & Economic Affairs Sosten Gwengwe said said as its interventions in businesses and promote production.
MDC was a fully government-owned and controlled profit-oriented entity, that was established in 1964 but became defunct in 2000 during President Bakili Muluzi’s administration.
Gwengwe told the media that the death of corporations such as the MDC has exposed the economy to myriad shocks and disruptions in the production and supply chains, citing closure of Peoples Trading Centre (PTC) as an example of an entity in which the state cannot directly intervene as does not have such mandate.
He is quoted by Times Group as saying: “A government must be able to intervene and if a government cannot intervene, it is a weak government but you would know that since the dawn of multiparty, we moved from intervention to liberalisation — which has failed our country.”
He further said revival of MDC “can be a carrier of equity into various companies that if we need to intervene, government must be able to intervene especially when our people are in an awkward situation”.
MDC was being financed by Agricultural Development and Marketing Corporation (Admarc), which was mobilising resources and channelling them to MDC towards investments.
The investments of the corporation saw the birth of many companies including the Commercial Bank of Malawi, Sugar Corporation of Malawi, United Transport of Malawi (UTM), which died due to privatisation under Bakili Muluzi administration.
One strong factor that is leading to high cost of living is scarcity of forex since, as chief economist Mhango alluded to be due to Malawi’s dependence on imported goods and services — even such as importing wheat.
Lesson from Neno on forex externalisation
In March, Member of Parliament for Neno North, Thoko Tembo posted on his Facebook page about the high cost of bread on the market, which goes between K2,200 to K1,600.
Tembo wrote: “If you had bread today, there is a 99% chance that the flour that was used to bake the bread is imported. Malawi imports most of its flour from Canada.
“The story of the demise of the wheat farmer is quite interesting. It was the early 90s and Malawi was making its democratic transition. Patriotism was at an all-time low.
“For a very long time during the Kamuzu era, Malawians had very little access to the outside world. Almost all the parastatals were headed by expatriate, who at every opportunity would tell those working beneath them, just how great their own countries of origin were compared to Malawi. As a result, most Malawians lost their pride and started to believe that anything foreign was far more superior than local.
“Press Bakery was the biggest bakery in the country at the time. Press Bakery purchased wheat directly from farmers in Neno and other places in the Northern Region. The bakery specialized in whole grain bread.”
MP Tembo maintained farmers produced enough wheat to feed the nation and that they grew the whole grain variety, saying “they preferred this variety since it could also be used for making nsima during times of famine — this was a win-win situation.
“As the country settled into a democratic dispensation, there was growing dissatisfaction with locally made products. The few rich Malawians who could afford to do their shopping in South Africa and those who had traveled abroad tasted South African white bread and they couldn’t wait to boast of their improved pallet when they returned home.
“Soon there was a growing demand for white bread. Sensing the gap in a liberal economy, business persons of Asian origin started to import wheat flour from far and wide to cater to those who wanted white bread.
“As their bakeries grew, they were faced with one problem — there was a restriction on how much wheat flour they could import since wheat was already grown in the country and relevant laws discouraged its import to protect the farmer.
“Faced with this challenge, they convinced the government that Malawian wheat was inferior to Canadian and Pakistani wheat. This wasn’t true — it was simply a different variety.
“Had the government taken time to research, they would have discovered that there are many varieties of wheat and that the variety used for cake flour is different from that used for flour used to make brown bread.
“If the government had looked into this matter critically, they would have discovered that all they needed to do was to encourage the farmers to grow a different variety of wheat — one for cake flour — to satisfy the democratic taste buds and the new market.”
Tembo said eventually, the government relaxed its laws and the new bakers were given import permits “and the market was soon flooded with imported wheat”.
“This eventually forced the local farmer to find alternative crops. As time went by the importation of wheat flour became a conduit for the externalization of forex.
“As we speak, wheat farmers are almost nonexistent except for a few who recycle their seeds every growing season and grow just enough wheat to cater for tea rooms in the Dambe area of Neno — one of the few remaining places where the authentic Malawian bread or scones can be tasted.”
Tembo said he and Neno farmers are working hard to bring the Malawian wheat farmers back, though indicating that “it’s an uphill fight but it is a fight that will be worth it”.
On October 5, Tembo posted a picture on Facebook, with the caption: “14 bags of wheat flour harvested and processed in Neno. We are ready to bake.”