Malawi’s FDI Landscape: Opportunities, Challenges, and The Road Ahead in 2024

Is Malawi open for business?

Investment in a foreign land is not an easily achieved task. Malawi actively promotes investment through legal reforms, incentives, forums, and streamlined services.

Stay updated on Malawian government policy changes and energy sector reforms, allowing private sector participation. We have gathered robust information on FDI in Malawi. To elevate your learning, do listen to our podcast by the respected official of Malawi, Attorney General Thabo Chakaka-Nyirenda wherein nuances of the above matter are further divulged.

Foreign Direct Investment

Foreign Direct Investment (FDI) is a significant investment by a company or individual in one country for business interests in another, promoting economic growth, job creation, technology transfer, and skill development.

Foreign Direct Investment in Malawi

Malawi's FDI flows have fluctuated, with a total stock of USD 1.36 billion in 2022, representing 10.9% of the country's GDP. The agricultural sector is the most attractive, while renewable energy projects and rare earth exploration are attracting new investments. However, challenges like administrative procedures, infrastructure, skilled workforce shortages, and high transportation costs hinder foreign investment.

Image source: Malawi -  Foreign Direct Investment, percent of GDP

Economy of Malawi

Malawi's economy, valued at $7.522 billion in 2019, is one of the least developed globally, with 80% of the population living in rural areas. Agriculture is the primary sector, employing a significant portion of the population. The government launched the Malawi 2063 Vision to transform the country into a wealthy, self-reliant, industrialized upper-middle-income nation. Despite having stable governments since 1964, the country faces challenges such as limited agricultural inputs and dry spells affecting output. Multi-party elections occur every five years.

Influence of Socio-Political Climate on FDI in Malawi

Malawi's political stability and peaceful democratic transitions have attracted foreign investment, but corruption remains a concern. The country ranks 117th on Transparency International's 2022 Corruption Perceptions Index, and frequent policy changes can create uncertainty. Maintaining policy continuity is crucial for sustaining FDI flows and preventing deterrent effects on foreign investors. The COVID-19 pandemic significantly impacted Malawi's economy, slowing GDP growth and decreasing FDI inflows.

YOU MIGHT BE INTERESTED IN: Inside Malawi with Attorney General Thabo Chakaka-Nyirenda: BITs, FDIs and Combating Corruption

Factors that Influence FDI in Malawi

A study found that market size, measured by real GDP per capita, is a significant determinant of FDI in Malawi, but not significantly associated with attracting inflows. The level of infrastructure in the economy, measured by investment stock or gross fixed capital formation, significantly influences FDI inflows into Malawi. Factors like real exchange rate, inflation, and money supply significantly impact FDI inflows, with high inflation and exchange rate instability potentially deterring FDI. Malawi's main FDI destinations include agriculture, telecommunications, manufacturing, tourism, and mining, with potential for growth in sectors like textiles.

Malawi's Legal System

Image source: Legal system

Malawi's legal system is based on English law, with modifications since 1969. It operates under an adversarial approach, similar to global common law systems. The system is influenced by the 1994 Constitution, legislation, common law, customary law, religious law, international law, doctrines of equity, and conventions. Institutions play a crucial role in promoting constitutional democracy and upholding the rule of law through resources like the Laws of Malawi Series.

Legal Framework in Terms of FDI 

Malawi's government encourages private investment in all sectors, excluding those with health, environmental, or national security risks. Foreign investors must register with MITC, and the Exchange Control Act regulates foreign exchange operations. The Malawi Constitution prevents nationalization. The legal system is based on English Common Law, with a Magistrate's Court, High Court, Supreme Court of Appeal, and commercial court.

Key Sectors for FDI in Malawi

Malawi's agricultural sector, renewable energy projects, mining exploration, telecommunications, manufacturing, and tourism attract significant foreign direct investment (FDI), with companies like CELTEL Malawi Limited from Kuwait investing in telecommunications and manufacturing from the UK and Canada.

Foreign Investors’ Participation

Image source: Agro-processing

Explore Malawi's investment opportunities in agro-processing, manufacturing, tourism, and renewable energy, requiring specific licenses, tax registrations, and land use permits. Participate in investment forums like Malawi-China and Malawi-Japan for networking and collaboration. It is to be noted that Malawi's government actively promotes foreign investment and aims to create an inclusive and self-reliant industrialized country by 2063. 

Government Promotion of FDI

The Investment and Export Promotion Act, 2024, was enacted in Malawi in February 2024, aiming to promote investment and exports through investment certificates, exporter registration, incentives, and services, allowing both domestic and foreign investors to invest in any economic sector.

Malawi's government hosts annual Investment Forums and Trade Fairs to attract foreign investment, prepares national investment policy, reviews industrial policies, offers investment certificates, and offers fiscal incentives.

Legal Requirements for Foreign Investors

Foreign investors in Malawi must invest a minimum of USD 50,000 in a company, while non-Malawians must have a valid permit and proof of investing USD 250,000. Malawi's English Common Law legal system allows foreign investors to establish, acquire, and dispose of business interests without mandatory partnerships.

Taxation for Foreign Investors

Image source: Corporate tax

The Malawi Government provides a 30% corporate income tax for resident companies and a 35% tax for foreign companies' permanent establishments. Priority sector companies can carry forward losses for six years, and priority sector companies can enjoy special tax rates of 0% for up to 10 years or 15%. Investors are not required to pay minimum tax based on turnover.

Tax Incentives for Priority Sectors

Mega farm investors can enjoy a 10-year tax holiday and import machinery and building materials duty-free. Customs & Excise Tax Incentives are imposed on ten major sectors that include construction, energy, tourism, agriculture, transport, mining, education, health, manufacturing, and export processing.

LISTEN TO THIS PODCAST: Inside Malawi: A Fascinating Tale of Independence and Identity with Hitesh Anadkat

Challenges Faced by Foreign Investors

Double Taxation Agreements (DTAs)

Taxation

DTAs are agreements between source and residence countries to address income taxation issues and provide guidelines for allocating taxing rights between the two countries. Malawi has DTAs with Denmark, France, Norway, South Africa, Sweden, Switzerland, and the UK to address income taxation issues. These agreements prevent double taxation by defining primary income rights, promoting transparency, and discouraging practices like base erosion and profit shifting. They offer tax exemptions or reduced rates.

Benefits for Foreign Investors Under DTAs

Malawi has signed bilateral agreements with the UK, Netherlands, and South Africa to prevent double taxation of income and capital. However, these agreements are criticized for unfairly allocating taxing rights to the residence country, limiting Malawi's tax revenue. Malawi's tax incentives and investment climate may be more important in attracting foreign direct investment, suggesting a need for renegotiating or updating these agreements.

Foreign Direct Investment Insurance Options in Malawi

Malawi's constitution promotes investment protection and an open economy, allowing foreign investment in all sectors except those posing health, environmental, or national security risks. The insurance sector is not restricted. However, foreign investors must undergo administrative procedures like business licenses, tax registration, and land permits. 

Investment Insurance

Malawi provides standard insurance products to foreign investors, including property, liability, and business interruption insurance, to mitigate risks associated with investments. However, there is no dedicated process for FDI insurance, so investors should identify risks, choose reputable providers, negotiate coverage options, and obtain relevant policies.

Currency Fluctuation

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Currency fluctuations in Malawi impact FDI inflows by increasing costs for foreign investors. Stable or appreciating local currencies make investments more appealing, while high exchange rate volatility can cause uncertainty and reduced confidence. Proper management ensures economic stability and boosts investor confidence, while fluctuations affect the cost-effectiveness and attractiveness of investments.

Assessing Risks

Foreign investors in Malawi should consider the risks associated with their investments, including potential benefits from Direct Tax Agreements, political stability, macroeconomic indicators, and sectors like agriculture, mining, energy, and tourism. Risks include climate-related shocks, regulatory changes, commodity price fluctuations, hydropower dependency, global travel trends, and currency volatility. The growth and small size of the Malawi Stock Exchange also require thorough research and expert consultation.

Recent Investment Projects

Bakhresa Malawi Ltd is constructing a $100 million cooking oil plant near their Limbe headquarters to boost local production and meet regional cooking oil demand, a significant industrial project underway.

The MITC publishes the Malawi Investment Projects Compendium, which highlights transformational investment opportunities across sectors like Energy, Agriculture, Manufacturing, Mining, Infrastructure, and Water, allowing investors to contribute to Malawi's economic growth and development.

Bilateral Investment Treaties (BITs) for Foreign Investors

Image source: Bilateral Investment Treaty

Bilateral Investment Treaties (BITs) significantly influence Foreign Direct Investment (FDI) by establishing legal agreements between governments to protect and attract investment. Despite the complex relationship due to endogeneity and selection issues, studies often use instrumental variables or matching approaches to assess BITs' impact on FDI. BITs provide investor rights, protection against discriminatory policies, and dispute settlement options.

Purpose of BITs in FDI

Bilateral Investment Treaties (BITs) are legal agreements between two governments that protect and attract Foreign Direct Investment (FDI). They provide clear rights for investors, protect against discriminatory policies, and establish terms for FDI. BITs help capital-importing countries attract FDI by offering legal protections while capital-exporting countries safeguard investments from political risks and instability. BITs create a conducive environment for FDI by offering legal certainty, protection, and dispute-resolution mechanisms.

History of BITs in Malawi

Malawi has a limited history with Bilateral Investment Treaties (BITs), having only signed one with Egypt in 1997. Compared to other African countries, Malawi's engagement with BITs is limited. The country has signed BITs with the Netherlands, Italy, and Zimbabwe, but most are not in force. Malawi's FDI inflows have been impacted by COVID-19, government efforts, and challenges like inadequate infrastructure and high transportation costs.

Specific Provisions of Malawi's BIT with Egypt

The Malawian Business Terms (BITs) outline conditions for foreign investments, including non-discriminatory treatment, fair treatment, minimum standards, expropriation, compensation, transfers, dispute settlement, exceptions, and termination clauses. However, the lack of specific text on Malawi's BIT with Egypt suggests a lack of active negotiation and signing, potentially impacting foreign direct investment flows. Investors must assess market liquidity and depth.

Malawi's BITs Performance

Malawi's BIT Comparison with Developed Countries

Malawi has only one known bilateral economic agreement (BIT) with Egypt, compared to developed countries like the US, Canada, and Europe. Developed countries typically have robust dispute settlement mechanisms, while Malawi's BIT lacks specific provisions. Malawi's BIT is poorly documented and lacks public input. Developed countries may have more leverage to negotiate BIT terms aligning with economic and social development goals, but the balance between investor protections and development needs remains uncertain.

Comparison to Other Regions of the World

Malawi's Bilateral Investment Treaties (BITs) are part of a global trend to attract and protect FDI. However, its engagement in BIT negotiations is limited compared to other regions. Over 2,500 BITs have been signed globally, with Europe and North America being the most active. The effectiveness of BITs varies among African countries, with the US negotiating only two in two decades.

LISTEN TO THIS PODCAST: Inside Malawi: A Fascinating Tale of Independence and Identity with Hitesh Anadkat

Provisions of Malawi's BIT Related to Foreign Direct Investment

BITs affect FDI flows 

Bilateral Investment Treaties (BITs) significantly boost FDI inflows in Malawi, with studies showing they can increase inflows by 43.7% to 93.2% when signed with developed countries. BITs' effectiveness depends on institutional quality and a favorable institutional environment. Termination of BITs can reduce inflows and investor confidence.

Tax Treaties Between Malawi and Other Countries that Affect Foreign Investors

Malawi's 1955 tax treaty with the UK restricts its taxation of UK companies, causing disputes with ActionAid and the Scotland Malawi Partnership. Meanwhile, Malawi's tax treaty with the Netherlands prevents withholding taxes. Malawi's tax treaties with Switzerland and South Africa, among its largest investors, are criticized for potentially limiting its ability to tax foreign investors. ActionAid and Scotland Malawi Partnership argue that these treaties unfairly favor wealthy countries, advocating for renegotiated agreements to boost development tax revenue.

Implementation of BITs Affects Malawi's Economy

Image source: Economy

The implementation of Bilateral Investment Treaties (BITs) in Malawi has significantly impacted the country's economy, with global economic trends influencing the relationship between FDI and Malawi's forex rates, with a downturn reducing investment and an upswing attracting more FDI and strengthening the Malawi Kwacha. Sovereign Wealth Funds (SWFs) significantly impact FDI by providing capital infusion, stabilizing economic influence, and promoting growth. Malawi's mining and agriculture projects may attract FDI but may negatively impact the Malawi Kwacha.

Impact of BITs on Development 

Business incentives (BITs) can boost economic growth, job creation, and technology transfer by providing legal protections and assurances. However, they can also hinder sustainable development policies and lead to investor-state disputes. Malawi can effectively use BITs by aligning terms with development goals, strengthening domestic institutions, promoting sustainable projects, and enhancing transparency.

Benefits of BITs for Foreign Investors

BITs ensure equal treatment for foreign investors in treaty countries, set limits on investment expropriation, and provide compensation for expropriation. They facilitate efficient fund transfers using market rates, limit performance requirements, and allow international arbitration for dispute resolution, eliminating the need for domestic courts. They also facilitate the efficient transfer of funds between host countries.

Benefits and Drawbacks of BITs for Malawi's Economy

Malawi's limited participation in signing BITs could hinder legal protections for foreign investors, restrict the government's ability to implement environmental regulations or labor standards and increase the risk of investor-state disputes, potentially leading to financial liabilities for the country.

Current Status of BITs in Malawi

Image source: Intellectual Property Rights

Malawi has a 1997 Bilateral Investment Treaty with Egypt. Some of the specific provisions are non-discriminatory treatment, intellectual property rights protection, remittance of funds, investment Incentives, and protection against expropriation. However, the absence of a BIT doesn't necessarily prevent foreign investment, as investors may still be attracted by the country's economic opportunities and investment climate.

Criticisms of BITs with Relation to FDI

Critics of Bilateral Investment Treaties (BITs) argue that there's no consensus on their effectiveness in attracting foreign direct investment (FDI) due to endogeneity issues, biased estimates, and incorrect inferences. They also stress that terminations can negatively impact FDI. They call for clearer language, local investment arbitration expertise, and reduced fees for foreign lawyers. Malawi's BITs for FDI are criticized for overstatement of benefits, limited government revenue impact, and potential distraction from development priorities.

Limitations of Malawi's BITs in Attracting Foreign Investment

Malawi's 1997 bilateral investment treaty with Egypt lacks transparency, causing concerns for foreign investors due to limited public input. The effectiveness of Malawi's dispute settlement mechanism is unclear, potentially hindering sustainable development goals and requiring robust provisions for foreign investors.

Taxation for Foreign Investors in Malawi

Malawi's non-resident companies face 35% corporate tax on their income, with additional withholding taxes on dividends, interest, royalties, fees, and rent. The country has signed a double taxation agreement with its home country, which could reduce or exempt these tax rates. Malawi offers tax incentives to both domestic and foreign investors, including 100% investment allowances on new and unused industrial buildings, 25% export allowances, duty, excise, and VAT exemptions on manufacturing raw materials.

Impact of BITs on Malawi's Economy

Image source: Stock exchange

Malawi's government aims to enhance the business environment, including BITs, to attract and retain foreign investment, despite challenges such as administrative procedures, inadequate infrastructure, and skilled workforce shortages. The Malawi Stock Exchange has experienced a 105% growth in the past year, ranking among Africa's top-performing exchanges. President Lazarus Chakwera has urged global investors to invest in Malawi's agriculture, tourism, and mining sectors. The 2021 Malawi Foreign Private Capital survey revealed a rise in liabilities to USD 3,717.9 million, primarily due to FDI from Mauritius, South Africa, and Mozambique.

Change in FDI Since the Implementation of the BITs

Malawi has signed bilateral investment treaties with the UK, Netherlands, and South Africa, but their impact on attracting foreign direct investment (FDI) is unclear. Malawi's Basic Income Tax (BIT) has modest benefits, with average inflows averaging $145 million between 2019-2021. However, BITs for FDI are criticized for overstatement of benefits, limited government revenue impact, lack of evidence for treaty renegotiation, and potential distraction from development priorities.

Investment Opportunities

The Malawi Investment and Trade Centre (MITC) offers a comprehensive investment project directory for sectors like energy, agriculture, manufacturing, mining, infrastructure, and water. The Invest Malawi portal connects companies, investors, and government trade advisors. Malawi's official websites provide investment opportunities, and participation in investment forums and events offers sector-specific information. AFSIC provides African investment consulting services and guidance from the UK-based Malawi High Commission.

YOU MIGHT BE INTERESTED IN: Inside Malawi with Attorney General Thabo Chakaka-Nyirenda: BITs, FDIs and Combating Corruption

Conclusion

In summary, while Malawi has maintained political stability, corruption and policy uncertainty remain challenges. The limited number of BITs and the pandemic's impact have also affected FDI flows in recent years. Addressing these issues and creating a more conducive business environment could help attract and retain foreign investment in Malawi.

The government is launching a one-stop service shop to streamline permits, licenses, and other investor services, promoting investment in key sectors like agriculture, renewable energy, and manufacturing. Foreign investment in Malawi can stabilize the macroeconomic environment by reducing inflation, maintaining a stable exchange rate, and strengthening the Malawi Kwacha.