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Country Commercial Guides for FY 2000: Malawi Report prepared by U.S. Embassy Lilongwe, released July 1999    Note*

VII. Investment Climate

Openness to Foreign Investment

53. 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. Currently, there are no explicit laws/rules on acquisitions, mergers and takeovers. Such laws may be introduced in the future as Malawi's privatization process deepens. Once introduced, the rules are likely to apply to both domestic and foreign investors.

54. There is no screening of foreign investment in Malawi. Because 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 and 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 both domestic and foreign investors. The Government has at times demonstrated bias against Malawi's ethnic Indian and Pakistani business communities.

55. All investors, irrespective of ethnic group or source of capital (foreign or local) may participate in the privatization program. However, nationals are offered preferential treatment, including discounted share prices and subsidized credit. These concessions carry a precondition that the shares or assets be retained for at least two years.

Right to Private Ownership and Establishment

56. 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. Generally, public enterprises compete equally with private entities with respect to access to markets, credit and other business operations. However, the state-owned Agricultural Development and Marketing Corporation (ADMARC) obtains credits directly from the Reserve Bank of Malawi.

Protection of Property Rights

57. Both foreign and domestic investors have access to Malawi's legal system, which functions fairly well, albeit slowly, and is non-discriminatory. It governs 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 Copyright Act, which protects copyright 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. The inadequate capacity of Malawi's Ministry of Commerce and Industry to track WTO developments will likely delay full implementation of the WTO TRIPS Agreement.

Performance Requirements/Incentives

58. In general, there are no performance requirements for establishing, maintaining or expanding an investment. No requirements are placed on ownership, source of financing, or geographical location. However, while both local and foreign investors are eligible for export processing zone (EPZ) status, it is limited to companies producing exclusively for export.

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

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

• a corporate tax rate of 38%;
• the following tax allowances:
  • 40% for new buildings and machinery;
  • up to 20% for used buildings and machinery; and
  • 100% deduction for manufacturing company operating expenses in the first two years;
• no import duty on heavy goods vehicles with capacity of ten tons or more;
• 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 that they are denied this incentive.);
• tax holidays or reduced corporate tax for new investments; and
• a maximum import tariff rate of 25%.

60. Malawi offers the following special incentives for exporters:

For exporters in EPZ's:

• 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; and
• no excise tax on local purchases of raw materials and packaging material.

61. Foreign investors are generally treated on a national treatment basis. 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 an investment/company: name of company, authorized share capital, registered office, location of books of accounts, address of the company secretary, and names of directors and shareholders.

62. Visas do not inhibit foreign investors, but employment permits can. Expatriate employees (of both domestic and foreign businesses) who reside and work in Malawi must obtain Temporary Employment Permits (TEP's). TEP's had become a major impediment to foreign investors in the recent past.

63. The Government issued a revised "policy statement and new guidelines for the issuance and renewal of employment permits" (one document) in November 1998. The new 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 TEP's 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 TEP's: 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 durations or less) which are granted for three-year periods and are renewable once. The U.S. Embassy has heard few complaints since the issuance of the revised policy statement.

64. The Malawi Government issues Business Residence Permits (BRP's) to foreign nationals who own/operate businesses in Malawi. BRP's are issued for five-year periods and are renewable. Permanent Residence Permits (PRP's) 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 BRP's and PRP's are currently under revision.

Transparency of the Regulatory System

65. 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 generated guidelines intended to increase Government use of transparent policies, to foster competition, and to establish clear rules. However, procedural delays, red tape, and corruption continue to impede the business and investment approval process. These include decisionmaking which is often neither transparent nor based purely on merit, and required land access approvals. Market prices for goods are generally not controlled, with the notable exceptions of sugar, petroleum products, and state-provided utilities. The Government has drafted legislation to allow private sector participation in state-owned utility companies, which supply electricity, water and telecommunications.

Corruption

66. There are allegations of corruption, particularly in the areas of customs and excise tax and government procurement. The Corrupt Practices Act provides the legal framework for combating corruption in Malawi. However, use of the Act has so far been insignificant.

67. The Anti-Corruption Bureau (ACB) is constitutionally mandated to investigate and prosecute corruption in Malawi. Opened in 1997 and fully staffed in 1998, the ACB has thus far brought forward one high-level case (filed in January 1999 and pending in court) involving a former Minister of Works. The ACB has completed a number of smaller investigations.

68. Malawi subscribes to, yet is not a signatory of, the OECD Convention on Combating Bribery. Malawi's Penal Code prohibits bribery. According to Section 90, giving or receiving a bribe -- whether to or from a Malawian or foreign official -- is a crime. A bribe to a foreign official cannot be deducted from taxes.

Labor

69. Preliminary results of Malawi's 1998 Census indicate that approximately half of the population is aged 18 or older. Unskilled labor with low productivity is plentiful. Skilled labor is scarce. Occupational categories with skill 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 (part of the University of Malawi) operates the country's Law School.

70. During the past five years it has become increasingly apparent that Malawi's HIV/AIDS epidemic threatens to undermine positive developments in Malawi. Many employers complain of increasing business costs -- for funerals, sick leave, and training -- associated with the HIV/AIDS epidemic, which affects an estimated 15% of the adult population. Malawi's National AIDS Secretariat estimates that almost one million Malawians are living with HIV.

71. Labor relations issues in Malawi are governed by the Labour Relations Act (LRA), signed into law in June 1996 and implemented in December 1997. The Act allows strikes and lockouts for registered workers and employers only after all dispute settlement procedures and conciliation efforts have failed. As democracy and trade union rights have existed for only six years, industrial relations are still evolving.

72. Workers have the legal right to form and join trade unions. 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 joining 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. There are no labor restrictions on choice of technology. 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.

Efficient Capital Markets and Portfolio Investment

73. Fiscal and monetary discipline slackened in 1997. In 1998 Malawi embarked on a six-month IMF staff-monitored macroeconomic program and succeeded in regaining control over the budgetary situation. The monetary situation in 1998 deteriorated due in large part to a shortfall in hard currency tobacco revenues. The MK/USD exchange rate depreciated by over 60% (in Kwacha terms) in August; inflation rose to 53% and 30% on year-on-year and average annual bases, respectively; and the discount rate climbed to 43% by December.

74. The economy began to show small signs of improvement in the first half of 1999. Inflation fell from 56.6% (year-on-year) and 2.6% (monthly) in march to 52.8% and 0.26% respectively in April; and the 91-day yield on treasury bills fell to 45% in June from 49.83% and 55.35% in May and April respectively.

75. 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. (As of July 1999, the Discount Rate stood at 47%. Commercial bank lending rates averaged 49%.)

76. Malawi has a sound banking sector, overseen and well regulated by the Reserve Bank of Malawi - its central bank. There are five full-service commercial banks : First Merchant Bank Limited; Finance Bank of Malawi ; Indefinance; National Bank of Malawi (NBM); and Commercial Bank of Malawi (CBM). The Malawi Government owns (through direct and indirect shareholdings) both NBM and CBM - the country's two largest commercial banks. Both banks operate on a commercial, for-profit basis. The owners of CBM include: Press Corporation Limited (PCL), 23%; Malawi Government (direct shareholding), 22%; and Malawi Development Corporation (MDC), 17%. Owners of NBM include PCL, 48%; and the Agricultural Development and Marketing Corporation (ADMARC), 39.16%. The Malawi Government wholly owns MDC, ADMARC, and is PCL's largest shareholder, the Press Trust (49%). As of March 31, 1999 total assets of the five commercial banks amounted to about 13 billion MK (about 300 million USD.) 77. Additional financial institutions include: Loita Investment Bank, Investment and Development Bank Of Malawi (INDEBANK), Investment And Development Fund Of Malawi (INDEFUND), Finance Corporation Of Malawi (FINCOM), Leasing And Finance Company Of Malawi (LFC), Malawi Savings Bank, the New Building Society (NBS), the Malawi Rural Finance Company (MRFC), and the Malawi Development Corporation (MDC). 78. 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).

79. Stockbrokers Malawi Limited (SML) is the only registered stockbroker in Malawi. SML runs a secondary market in government securities, and both local and foreign investors have equal access to purchasing these securities. SML began trading shares of companies towards the end of 1996. The following companies are listed on the MSE: National Insurance Company Of Malawi (NICO), Blantyre Hotels Limited (BHL), Sugar Corporation Of Malawi (SUCOMA), Commercial Bank of Malawi (CBM), Packaging Industries Of Malawi (PIM) and Press Corporation Limited (PCL). Old Mutual, an insurance and financial services group (with over 15,000 policyholders in Malawi), listed on July 12, 1999. NBM, Import and Export Company, and Malawi Property Company (MPICO), are likely candidates for listing later in 1999. As of June 25, 1999, 1,159.01 million shares were in issue on the MSE, and the market capitalization was 7,368.25 million Mk (about 171.36 million USD.) Malawi and other SADC markets are taking steps to harmonize listing requirements through the SADC stock exchanges co-operation initiative.

80. SML's development is in its nascent stage. Hostile takeovers have not yet occurred. 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 those large MSE-listed companies requiring significant technical and financial resources. The Competition and Fair Trading Act covers activity on the MSE.

Conversion and Transfer Policies

81. There are no restrictions on remittance of foreign investment funds (including capital, profits, loan repayment and lease repayment) 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. 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. 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 March 1999, foreign reserves were 4.6 months of import cover.

Expropriation and Compensation

82. Malawi's constitution prohibits deprivation of an individual's property without due compensation. There are also 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. Public tenders for the sale of shares of state-owned enterprises often encourage local participation, but there are no laws that compel local ownership.

83. In 1996, the Government established a Land Reform Commission to review land matters and establish a new land reform program. Hampered by funding problems, the Commission did not begin work until 1997. Its final report is expected in July 1999. 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 non-traditional land (i.e. land outside jurisdiction of local village leaders) in Malawi is held under long-term (99-year) lease.

Dispute Settlement

84. Malawi has an independent but overburdened judiciary, which derives its procedures from English common law. There is 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 allegations of bribery in civil and criminal cases. Administration of the courts is weak, and due process can be slow. Serious shortcomings in the judicial system include poor record keeping, a lack of attorneys and trained personnel, heavy caseloads, and insufficient financial resources.

85. The court system in Malawi accepts and enforces foreign court judgements that are registered in accordance with established legal procedure. There are, however, reciprocal agreements among commonwealth countries to enforce judgements without this registration obligation. There is no such agreement between Malawi and the U.S.

86. Malawi has legislation that offers adequate protection for property and contractual rights. (See paragraph 57.) Malawi has written commercial laws that codify common law. The Sale-of-Goods Act and the Hire-Purchase Act cover commercial practices. These laws have been consistently applied. 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 -- ranked-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. (See paragraph 95.)

87. 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.

Political violence

88. Malawi has been largely free of political violence since gaining independence in 1964. Apart from the disarming of the paramilitary Malawi Young Pioneers, incidents of violence associated with Malawi's 1994 transition to democracy were rare and minor. 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 sporadic, limited incidents of post-election violence (primarily small-scale property damage) in June 1999. 89. Incidents of labor unrest occasionally occur. Armed robberies (including carjackings) have increased in recent years. There are, however, no nascent insurrections, belligerent neighbors, or other politically motivated activities of major concern to investors.

Bilateral investment agreements

90. Malawi's policy is to negotiate bilateral investment treaties with countries whose nationals opt to invest in Malawi. The United States canceled the U.S.- Malawi double taxation agreement from the colonial period 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.

91. 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.

C. OPIC and other insurance programs

92. Malawi has had an OPIC investment guarantee agreement since 1967. As noted in paragraph 91, Malawi is also a member of MIGA. In April 1999 the U.S. Export-Import Bank announced its decision to make available short-term export-finance insurance to Malawi under a new Africa Pilot Program. The estimated annual U.S. dollar value of local currency likely to be used by the U.S. Mission in Malawi is about 3.0 million. Malawi operates a floating exchange rate system. In August 1998, the Kwacha depreciated by over 60% against the U.S. dollar caused in large part by the unexpectedly poor foreign exchange earnings from tobacco sales. Since that time the Kwacha/U.S. Dollar rate has stabilized at approximately 43. Many private sector business people expect the Kwacha to depreciate again in 1999, albeit less drastically than in 1998. As of July 1999, the Reserve Bank of Malawi claimed that it held sufficient foreign exchange reserves to maintain the exchange rate.

Major foreign investors

93. Per paragraph 81, foreign investors must initially register their investments with the RBM as a precondition for future remittances. The Reserve Bank of Malawi maintains records on the value and composition of foreign direct investment in Malawi. The Reserve Bank cautions that the figures provided in Appendix D may under-represent the actual amounts of foreign direct investment.