Economics Assignment - 2

Student ID : 211320108

MANAGERIAL ECONOMICS – ASSIGNMENT 2

GENERAL ELECTRIC: ROOM AIR CONDITIONERS - MALAWI

Submitted by,

Lalit Singh

Student ID : 211320108 Email: [email protected]

Malawi

Lilongwe

key figures• Land area, thousands of km! 118• Population, thousands (2007) 13 925• GDP per capita, USD at

constant 2000 prices (2007) 158• Life expectancy (2007) 48.3• Illiteracy rate (2007) 34.1


The objec t ive of th is repor t i s to make a s t ra teg ic assessment of the macroeconomic s t rengths and weakness of

Malawi to dec ide on the inves tment dec is ion of 100 Mil l ion in Genera l E lec t r ic – room a i r condi t ioners in

Malawi . Landlocked Malawi ranks among the wor ld ' s most dense ly popula ted and leas t developed countr ies .

The economy is predominate ly agr icu l tura l wi th about 80% of the popula t ion l iv ing in rura l a reas . Agr icu l ture ,

which has benef i ted f rom fer t i l izer subs id ies s ince 2006, accounts for more than one - th i rd of GDP and 90% of

expor t revenues . The economy depends on subs tan t ia l in f lows of economic ass is tance f rom the IMF, the World

Bank , and indiv idual donor na t ions . The government faces many chal lenges inc luding developing a market

economy, improving educat ional fac i l i t ies , fac ing up to environmenta l problems, dea l ing wi th the rap id ly

growing problem of HIV/AIDS, and sa t i s fy ing fore ign donors tha t f i sca l d isc ip l ine i s be ing t igh tened . The

government has announced inf ras t ruc ture pro jec ts tha t could y ie ld improvements , such as a new oi l p ipe l ine ,

for be t te r fue l access , and the potent ia l for a waterway l ink through Mozambican r ivers to the ocean , for

bet te r t ranspor ta t ion opt ions . But due to shor tage of fore ign exchange s ince 2009, Malawi has exper ienced

some se tbacks , which has damaged i t s ab i l i ty to pay for impor ts , and fue l shor tages tha t h inder t ranspor ta t ion

and product iv i ty.

Under cons idera t ion of development of new bus iness of room a i r condi t ioners in Malawi , i t i s very cruc ia l to

unders tand the aggregate demand. The na t ional ident i ty funct ion for aggregate demand (% GDP) i s as fo l lows

AD = C + I + G + (X -IM)

Each fac tor respons ib le for increas ing or decreas ing a aggregate demand. The AD Curve shows re la t ionship

between AD and Malawi Pr ice Level i .e . Consumer Pr ice Index

There are several macroeconomic factors, which need to be addressed to make investment decision to create aggregate demand of

new business of room air conditioners in Malawi.

1. GDP PER CAPITA & POOR COUNTRY:

AD# AD#

Real#Na)onal#Income#

Infla)on#

Real#Na)onal#Income#

Infla)on#

Rise# In# price# level# causes# a#contrac)on# in# AD,# whereas# Fall# in#price#level#causes#expansion#in#AD#

In# short# run,# shi<s# in# AD# cause#fluctua)ons# in#economy’s#output#of#goods# &# services# whereas# in# long#run,#it#affect#overall#price.#

Macroeconomic#Factors##

The GDP per Capita at current prices in US dollars in Malawi

was reported at 354 U.S. dollars in 2010 and expected to be

464.97 U.S. dollars by 2015. Malawi’s real gross domestic

product (GDP) is estimated to fall to 6.7% in 2010 from 7.6%

in 2009. The slight reduction in real GDP growth is largely

attributed to reduced agriculture output for maize and tobacco

due to the drought experienced in some parts of the country at

the beginning of the 2009/10 growing season. The main driving

force for economic growth in 2010 has been strong

performance in mining and quarrying, construction, financial

and insurance services and information and technology.


2. INFLATION & UNEMPLOYMENT RATE:

3. REAL INTEREST RATE:

4. NATIONAL DEBT (%GDP):

5. INTERNATIONAL FACTORS: (EXCHANGE RATE & FOREIGN INCOME)

!

0!5!10!15!20!25!30!35!40!45!

2007! 2008! 2009! 2010! 2011*!

National(Debt(%

GDP)(

Years(

As a result of good macroeconomic management, Malawi

now has better macroeconomic indicators. As per IMF, the

Average Inflation in Malawi was reported at 8.00 percent

change in 2010 and expected to be 5.62 percent change by

2015. Large number of Labor force is available for work

but there is shortage of skilled workforce as evident from

poor literacy rates.

As per IMF, the national debt (%GDP) in Malawi was

reported at 40.5 in 2010. Total external debt is the sum of

public, publicly guaranteed, and private nonguaranteed long-

term debt, use of IMF credit, and short-term debt. Due to

good track record of good macroeconomic management,

Malawi reached the HIPC completion point in 2006 and

subsequently, qualified for multicultural debt relief initiative

but still Malawi has huge debt.

Real interest rate is the lending interest rate adjusted for

inflation as measured by the GDP deflator. It plays

important role in shaping investment decisions but the

demand for capital goods tends to be inelastic after the

changes in interest rates – a least in the short term. Lower

interest rates encourage firms to borrow and invest. Malawi

still have high real interest rate of 15%.

The Official exchange rate (LCU per US dollar; period average)

in Malawi was last reported at 150.05 in 2010, and 140.52 in 2008

according to a World Bank. The exchange rate that has the most

powerful effect on price levels in Malawi and it plays important

role as nominal anchor of stabilization in economy. Due to

depreciation of Malawi Kwacha, its purchasing power capacity is

decreasing – thereby discouraging imports and encouraging

exports - the net result should be that Malawi AD rises. An

increase in overseas incomes raises demand for exports and

therefore Malawi AD rises. But Malawi’s export basket is highly

concentrated in a few products, leaving the country highly

vulnerable to demand changes and terms of trade shocks. Just four

crops (Tobacco, tea, sugar and cotton) account for 75 per cent of

exports. This represents the key weakness of Malawi’s economy.


6. CHANGES IN FISCAL POLICIES:

(GOVERNMENT SPENDING, WELFARE BENEFITS AND TAXATION, AND THE GOVERNMENT BORROWING)

7. INFRASTRUCTURE FACILITIES:

Malawi has poor infrastructural facilities which impacting on returns to investment and constraining new investment.

Dependency on rain – fed agriculture increases the volatility of output performance. Irrigation in Malawi is scarce and only 27

per cent of potential land is irrigated and lower income of people forces them not to use technological methods of irrigation.

Regular droughts & flood situations have put the Malawi economy on risk as it has strong dependence on agriculture.

8. GOOD GOVERNANCE, REGULATORY FRAMEWORKS AND POLITICAL STABILITY:

A stable, well – regulated macroeconomic environment depends on the quality of governance. Malawi is a democratic, multi-

party government, and its government has been facing many challenges including developing a market economy, improving

educational facilities, facing up to environmental problems, dealing with the rapidly growing problem of HIV/AIDS, and

satisfying foreign donors that fiscal discipline is being tightened. Government has taken measures to reduce down corruption

and exhibited improved financial discipline by signing a three-year agreement for poverty reduction and growth facility with

IMF. But after cancellation of public foreign debt under the HIPC and MDRI programmes, the government has been struggling

9

g) Limited Irrigation and Infrastructure

Agricultural production in Malawi is mainly rain-fed. Irrigation in Malawi is scarce and only 27 per cent of potential land is irrigated. The dependence on rain-fed agriculture makes the output performance of this sector highly volatile. Malawi farmers rarely use even low cost, technologically simple means of irrigation, reflecting their inability (due to a lack income, mainly) to undertake even such small investments.

Historically Malawi has experienced serious droughts (1992, 1994, 1997, 2002, 2005) and floods, both of which have impeded agricultural productivity, damaging both agricultural land and crops. This rainfall variability is thought to have intensified risk-averse behaviour by farmers and investors in agricultural industries and services, limiting diversification into other cash crops.

Infrastructure in Malawi is poor. As a landlocked country, Malawi is marked by very high transport costs, amongst the highest in the world (Figure 5). Road conditions have improved significantly since 2004 but are still inadequate. In 2007, 33 per cent of the total road network was in good condition compared to 24per cent recorded in 2006. Improvement in road infrastructure is the result of active donors’ support, notably that of the European Union. Much of this upgrading however has been of main roads. Unpaved roads that serve the majority of the population remain in poor condition, making it difficult for farmers to move their crops for sale and making them dependent on local traders who pay lower than market prices.

The state of power infrastructure is also poor, impacting on returns to investment and constraining new investment. As Figure 6 indicates Malawi had the highest level of sales losses due to power outages, compared with other sub-Saharan African countries.

Figure 5. Transports Costs

0% 20% 40% 60%

Swaziland

Lesotho

Zimbabwe

Botswana

Zambia

CAF

Burkina Faso

Niger

Burundi

Uganda

Mali

Chad

Rwanda

Malawi

Transport costs / value of exports

Source: African Development Bank 2009

10

Figure 6. Electricity Supply Shortfalls

0% 2% 4% 6% 8% 10%

Low income

SSA

South Africa

Uganda

Zambia

Kenya

Madagascar

Tanzania

Malawi

Median sales losses due to power outages

0% 20% 40% 60% 80%

Low income

SSA

South Africa

Madagascar

Uganda

Zambia

Malawi

Tanzania

Kenya

% of firms with generator

Source: African Development Bank (2009)

Malawi government has increased its expenditure. E.g. financed by a

15.2 % higher budget deficit, - this directly increases AD.

Income Tax affects disposable income. Malawi’s Lower rates of income

tax raise disposable income and should boost consumption of goods.

An increase in transfer payments raises the AD – particularly if welfare

recipients spend a high % of the benefits they receive.

Government borrowing (% GDP) in case of Malawi is continuously

decreasing

Malawi has very poor road conditions. Even though actions have been taken to

improve the same since 2004 but still only 40 % of total road network has covered.

Much of this up gradation has been of main roads. Unpaved roads that are more

important for farmers to move their crops for sale, are still in poor condition and

making them dependent on local traders who pay lower than market prices.

Malawi had the highest level of sales losses due to power

outages, compared with other sub – Saharan African

countries. Electricity is restricted to the larger urban areas

and 90 % of population has no access to supply. Moreover

the generation of Electricity depends on Hydropower

phenomenon, which in turn dependent on proper preservation

of water, which itself is problem in Malawi.


to limit the public spending and maintain economic policy and further split up in the majority party due to stiff resistance in

implementation of reforms increases the risk of political instability in Malawi. In spite of this, Malawi state of ‘peacefulness’

has ranked 2nd in African Continent and ranked 47th out of surveyed 144 countries for the Global Peace index (GPI).

9. LABOR PARTICIPATION RATE & LITERACY RATE:

There is a wide gap in education attainment in Malawi.

The primary school attendance rate reasonably high -88 per cent for girls and 82 per cent for boys. Secondary school

attendance, however, is very low - 22 per cent rate for girls and 25 per cent rate for boys (NSO 2009). Malawi has the

lowest number of technical and vocational students relative to comparator countries. This is reflected in the high

proportion of unskilled workers in Malawi’s Manufacturing sector.

10. URBAN POPULATION GROWTH RATE AND PEOPLE HOUSEHOLD EXPENDITURE PATTERN:

11. TIME REQUIRED TO START A NEW BUSINESS & MANAGEMENT TIME DEALING WITH OFFICIALS:

The Labor participation rate; total (% of total population ages

15+) in Malawi was reported at 76.80 in 2008, according to

the World Bank. This shows Malawi has large number of

workforce available irrespective of skillset. Wages of

workforce in Malawi is Very Low and the productivity of

Malawi’s workforce is low. Labor productivity growth was

negative between the years 2000 and 2004 and showed a

positive increase of 4.6 per cent during 2005-2008.

The Urban population (% of total) in Malawi was reported at 18.80 in

2008, according to the World Bank. Urban population refers to people

living in urban areas as defined by national statistical offices. Malawi has

experience continuous increase in population in urban areas. These people

represent the class of population who has maximum reach to use electricity

and their household expenditure income is also very higher than average

income of Malawi’s population & created huge income level difference.


The Time required to start a business (days) legally in Malawi has been constantly reported at 39.00 days in 2010,2009,

and 2008 according to a World Bank report. Time dealing with officials is the percentage of management time in a given

week spent on requirements imposed by government regulations (taxes, customs, labor regulations, licensing and

registration) and it was reported as 3.45 in 2010.These details shows that Malawi has streamline its process to attract new

firms to open new businesses in the country.

12. TARIFF RATE, APPLIED; WEIGHTED MEAN; ALL PRODUCTS (%)

13. CURRENT ACCOUNT BALANCE IN USD:

INVESTMENT DECISION CONCLUSION: The investment decision for room air conditioners in Malawi has strong

relation with the expected return from the capital investment of 100 Million USD. Expectations of demand, prices, and

cost over the lifetime of the investment are key determinants of expected returns. There is always uncertainty about the

expected rate of return particularly when demand is volatile and sensitive to changes in business climate such as interest

rates, Exchange rate, and incomes etc.

Major macroeconomic factors favoring the investment decisions are stable growth in GDP per Capita, Low inflation,

Large workforce availability with lower wage rate, increase in government spending, decreasing in government

barrowing, lower income tax rates, good governance, regulatory frameworks, large increase in urban population with

more disposable income, climate conditions of Malawi, Openness to trade, regulatory frameworks to reduce down the

establishment period of new business & time required to deal with official people, lower tariff rates, Preferential access to

world markets under COMESA, SADC, LOME IV, AGOA, peaceful country, modern telecommunication access, and

improved current account balance whereas there are certain macroeconomic factors which are restricting the investment

decision of room air conditions in Malawi are poor economy, large difference in income levels, instability in political

environment, Lack of diversified export products, strong dependence on rain – fed irrigation, more exposure to floods and

droughts situations, High lending rates from bank, high Debt/GDP ratio, depreciation in exchange rate value, poor

infrastructure facilities such as high transport costs and very low reach and availability of electricity with in Malawi,

unhealthy environment with respect to corruption. In consideration of all these macroeconomic factors, it is recommended

to go for investment in room air conditioners in Malawi provided the political stability would be repositioned and

sufficient steps would have to be taken to improve and control over monetary, fiscal policies and to improve on

infrastructural facilities such as improvement in existing power generation technique of Hydropower and to identify other

renewable resources of energy to generate the power such as bio gas, leaves decoction etc.

Government of Malawi has taken sufficient measure to

reduce down the tariff rate to the lowest possible level to

attract businesses to move into Malawi.

The Current account balance in US dollars in Malawi was

reported at -0.36 billions U.S. dollars in 2009, according to

the International Monetary Fund (IMF). In 2015, Malawi's

Current account balance in US dollars is expected to be -

0.12 billions U.S. dollars. Current account is all

transactions other than those in financial and capital items.


Note: It seems to be important to include all the articles and sources of information to make a strategic assessment of macroeconomic factors of Malawi so I am attaching separate sheet for the same.

BIBLIOGRAPHY

1. http://www.africaneconomicoutlook.org/en/countries/southern-africa/malawi

2. Riley Geoff, Macroeconomic – Supply side policies, Eton College, September 2006

3. Riley Geoff, Macroeconomic – Capital Investment & Spending, Eton College, September 2006

4. Kazembe Pilirani and Namizinga, The Impact of Foreign Direct Investment on Development: Policy Challenges

for Malawi, Integrated Framework Policy Analysis Working Paper Series No.6, Govt. Of Malawi.

5. https://sites.google.com/site/malawimurphc/economics/business-climate

6. http://www.chforum.org/library/xc123.shtml

7. http://www.indexmundi.com/malawi/gdp_real_growth_rate.html

8. http://www.tradingeconomics.com/malawi/indicators

9. Phiri MJM, Concept paper on the development of the industrial policy for Malawi, Malawi Investment

promotion Agency

10. Pfeffenzeller Stephan, Economic Growth: What Macroeconomic Factors Lead to Economic Growth?, economics

lecturer at the University of Liverpool,

Economics Assignment - 2

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