Start from import substitution

Recently, the Reserve Bank of Malawi (RBM) announced a 44 percent devaluation of the kwacha.

While the country is in despair, anguish and uncertainty, certain fundamental steps must be taken to reverse the trend.

By devaluing its currency, a country makes its money cheaper and boosts exports, rendering it more competitive on the global market.

Conversely, foreign products become more expensive, so the demand for imports falls.

For Malawi, the need for imports is unlikely to fall.

The accelerated loss in value of the kwacha is due to lack of exports while imports remain high. This trade imbalance has persisted despite previous adjustments of the exchange rate through the auction system.

Economists say the best way to grow Malawi’s economy is through exports, but this would take time as it largely requires industrialisation.

The country mostly exports raw materials that are sold cheaply, processed elsewhere and sold back to us at higher prices.

Industrialisation is imperative to stablise and grow the ailing economy. This, however, must happen while working to curb Malawi’s ever-increasing appetite for imports, which exerts pressure on forex reserves.

Import substitution is popular in economies worldwide to satisfy a greater proportion of a country’s total demand for goods through its own domestic production.

Promoting local industries provides several advantages, especially for an economy like Malawi’s, which thrives on non-mechanised and rain-fed agriculture.

Amid threats of job losses due to the increased cost of production emanating from the devaluation and a lean tax base due to high unemployment rates, import substitution could help create jobs in the local industries. 

To substitute imported products, the country has to increase the number of industries that will, in turn, demand more workers, create new job opportunities and grow the taxable population.

For months, Malawi has been facing recurring fuel shortages due to forex scarcity.

Foreign currency, especially the US dollar has been in high demand for the importation of various goods, including those that can be manufactured locally such as toothpicks.

Banning the importation of goods that can be manufactured locally could save the country’s forex reserves for the importation of essential commodities such as drugs, fuel and fertilisers.

Import substitution also provides a starting point for the export of goods and services.

Substituting finished foreign goods with local offerings, would protect local producers from preventable competition and allow them to master their trade and add value for the export of goods.

The surge in imports silently kills small businesses as Malawians prefer importing to buying locally manufactured goods.

The import substitution policy aimed at boosting local dairy production is yielding positive results in Zimbabwe. This is a country witnessed a significant increase in milk production during the first five months of 2023.

They have since reported a six percent rise in milk production, reaching 38 million litres compared to the 36 million litres produced in 2022.

This surge in local milk production has led to a substantial reduction in milk imports, with a decrease of 86 percent recorded, from 3 418 tonnes in 2022 to 465 tonnes in the current year.

These are deliberate efforts by the Zimbabwe Government to achieve 100 percent import substitution by 2025.

These initiatives minimize reliance on milk imports, conserve forex and position Zimbabwe favourably in the export market.

As the Malawi Government works hard to create an enabling environment for exports, it must seriously consider import substitution to improve our situation quickly.

This might involve passing the necessary laws and improving the monitoring mechanisms for imports and exports.

To ease the suffering of Malawians, the government should consider lowering taxes and increasing government spending as a short-term solution to the situation at hand.

The post Start from import substitution appeared first on The Nation Online.

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