Mining & Trade News

Standard Bank Group has forecast that higher agricultural production expected this year due to favourable rainfall patterns will result in good economic performance for Malawi despite the prevalence of the coronavirus (Covid-19) which continues to weigh on the country’s economy.

In a summary of audited financial results for the year ended December 31, 2020, the Bank says business activities slowed down in the year 2020 due to economic challenges caused by Covid-19 pandemic.

It says the downward business trend resulted in drought in foreign currency, the challenge the organization believes will persist this year due to the the pandemic.

“The negative economic effects of Covid-19 pandemic will likely continue in 2021 and currency pressures are expected to continue, largely driven by weak foreign currency inflows which can partly be attributed to the ongoing pandemic,” reads the statement in part.    

The statement also says, besides Covid-19 effects on the organization’ activities, volatile political environment during the first half of the year also impacted its operations.

In 2020, the statement says, inflation rate was notably low, the development that has been attributed to lower food inflation rate in the year whose gross inflation rate was 8.6 percent from 9.4 percent in 2019. In the same year, food inflation and non-food inflation averaged 13 percent and 4.7 percent from 14.3 percent and 5.3 percent in 2019.

The statement says during the same period, the local currency weakened against the Unites States Dollar, which was partly due to reduced supply of foreign exchange on local foreign exchange markets.

“2020 was a challenging year due to the impact of the coronavirus on the macro-economy and the group’s operations. However, despite the challenging operating environment, the group posted a strong set of results,” reads the statement.

The statement further says, after paying its taxes, the group registered a profit of K23.7 billion, which was 50 percent above the profit the bank made in 2019.

During the year, the Bank experienced six percent growth in net interest income, which was a result of growth in loans and advances to customers that grew by 11 percent, despite reduced appetite in the lending space due to the pandemic.

The Ministry of Finance has described an increase in imports of items for the novel coronavirus (Covid-19) management as well as strategic commodities under the Affordable Inputs Program (AIP) as the main catalysts for worsening of the country’s trade balance.

In the 2020-21 Mid-Year Budget Review in Parliament last Friday, Minister of Finance Felix Mlusu said the country has registered heavy imports of the products following the rise of covid-19 cases and increase in demand for AIP products as Malawi clocked the agricultural growing season, a situation which has widened trade deficit.

“Madam Speaker, the country’s trade balance continues to worsen.”

“As at end December 2020, trade deficit widened to US$566.7 million from US$352.8 million recorded during the same period in 2019,” Mlusu said.

Mlusu also said at the end December 2020, Gross Official Reserves stood at US$574.3 million, representing 2.8 months of imports, down from US$846.6 million, 4.1 months of imports recorded in December 2019.

He said the situation has forced the Malawi Kwacha exchange rate against major trading currencies during the year 2020 to face some depreciation pressure.

Mlusu said from June 2020 to December 2020, the Malawi Kwacha depreciated by about 5% against the United States dollar.

He also said the Malawi economy in the year 2020 grew marginally by 0.9%, a downward revision from the estimated growth rate of 1.9% detailed during the 2020/21 budget formulation.

Mlusu said: “This economy, Madam Speaker, continues to suffer from the adverse effects of the coronavirus pandemic which compelled Government to impose containment measures, including partial lockdown and restrictions on mobility.”

“Internationally, Malawi’s economic activities have been hampered by border closures in neighboring countries as well as containment measures in major trading partners such as South Africa, Europe and China.”

The Minister also cited that the Finance Ministry has forecasted preliminary Gross Domestic Product (GDP) growth rate for the year 2021 at 3.5%.

Mlusu said the estimate follows normal to above normal rains that the country has received so far, although localized dry spells are being experienced in some districts mostly in the southern and eastern regions of Malawi.

According to Mlusu, growth in 2021 will also be significantly bolstered by the expected increase in agriculture output due to the impact of AIP.

He said: “Madam Speaker, enhanced growth prospects in 2021 are also buttressed by the on-going Government infrastructure development projects in the road, energy and agriculture sectors, most of which are growth enablers.”

“Furthermore, Madam Speaker, just as in many other countries, the Covid-19 vaccine is also expected to spur business and economic confidence.”

“It is however, important to remember that economic growth in 2021 and beyond is dependent on how fast the second wave of the pandemic dissipates.”

Meanwhile, State President Lazarus Chakwera has assured local Small and Medium Enterprises (SMEs) that his government will operationalize a new Public Procurement and Disposal of Assets  Act that will prioritize local SMEs in awarding of government contracts.

Chakwera said his administration is enforcing the new Act to confine the procurement of several goods and services to local SMEs.

He said: “This effectively brings to an end the procurement policy of past administrations that allowed the concentration of public contracts in the hands of large and foreign businesses for the supply of goods and services that can ably be supplied by local SMEs.”

“Additionally, these policies will inject the much-needed liquidity into the economy by putting money in the pockets of Malawians, enabling them to care for their families, which will in turn stimulate economic activity.”

“To prepare for potential liquidity shortages during the coming weeks of the state of national disaster, my administration has activated the Emergency Liquidity Assistance (ELA) framework to support banks in the event of worsening liquidity conditions.”

Chakwera also said under his leadership, the Government has extended the Reserve Bank’s moratorium arrangement on loan facilities for another six months to June 2021.

He said the moratorium has been designed to give businesses that are operating on funds borrowed from banks some breathing space to stop bleeding from the blows of the pandemic.

The mid-year budget review revised the earlier budget projection from MK2.19 trillion to MK2.33 trillion.

The Tobacco Commission (TC) has advised tobacco growers in the country to give adequate care to their crop to reduce post- harvest losses saying most local farmers do not adequately benefit from their yields as about half of it is lost before it is sold.

TC CEO Joseph Chidanti Malunga says in a Press Statement that tobacco farmers should ensure appropriate harvesting time and set up good storage facilities to avoid post-harvest losses.

He also advises tobacco growers to avoid engaging minors in their activities, the conduct he described as illegal.  

“During these operations growers should not use children under the age of 18 years, for this conduct is against the rights of children. Growers who will be noticed using child labour, will have their licenses revoked and their tobacco will not be receipted at the auction floors,” warns Malunga in the statement.

TC also advises tobacco growers to sell their leaf at the Auction Floors other than to vendors in order to benefit from better market prices.

The Ministry of Agriculture has repeatedly complained over the increase in the number of illegal tobacco vendors who buy the leaf from farmers at lower prices to sell to the Auction Floors.

The Commission stresses in the statement to the general public and tobacco growers that tobacco vending is an offence under Tobacco Industry Act, and anyone caught in the act will be convicted by the court of law.

“The Commission reminds the general public and tobacco growers that tobacco vending is an offence under the Tobacco Industry Act and any person involved in the practice will be convicted by the court of law,” states Malunga..

Government through the Agricultural Development and Marketing Cooperation (ADMARC) has provided Auction Holdings Limited (AHL) with financial resources to ensure smooth running of operations at all the four AHL deports.

“In this regard, tobacco growers are being assured that all AHL Tobacco Auction Floors of Limbe, Lilongwe, Chinkhoma in Kasungu and Mzuzu will operate normally without threat that the industry remittances would be affected as AHL Group facilities are duly secured by AHL Group and Government,” says Malunga.

Malunga recently told Mining and Trade Review that the Commission will ensure that tobacco farmers are offered better prices for their leaf this season.

The Tobacco Commission (TC) says it expects an improvement in tobacco prices during this year’s selling season.

CEO Chidanti Malunga said in an interview that TC in coordination with the Ministry of Agriculture is doing everything possible to ensure that farmers benefit from their works by, among other things, ensuring that they are offered attractive prices.

He said one way of making sure that farmers are supported is by setting minimum buying prices every year for buyers to adhere to.

Malunga, however, expressed worry over the reduction in number of tobacco farmers who registered to grow the crop this season. Reports indicated that the number of growers this season has gone down by 5% when compared to the number of farmers who registered last season.

He, therefore, said TC has developed strategies designed to increase the number of tobacco farmers during the next growing seasons.

Tobacco Association of Malawi (TAMA) Spokesperson Sam Kalimba commented that the number of farmers interested to grow tobacco was declining because of low market prices for the leaf and World Health Organisation championed anti-smoking lobby.

Kalimba, however, said despite challenges the industry is facing, there is still hope for the local leaf which he said still enjoys huge demand. But he urged farmers to produce the leaf in line with trade demand and following all good agricultural practices.

“There is still huge demand for local tobacco and what is required is growing the leaf using good agricultural practices, including recommended labour practices,” said Kalimba adding that agricultural extension advisors are also critical in ensuring quality production by participating farmers.

The Malawi Stock Exchange (MSE) has urged the private sector, including mining companies, to utilize the local stock market in accessing a wide pool of funds through multi-platforms provided by the entity, especially during this period when a lot of companies have been affected by the Covid-19 pandemic.

MSE Operations Manager Kelline Kanyangala said after observing the country’s growing infrastructure developments that are capital intensive, MSE has been motivated to step into play with investment capital for private companies.

Kanyangala said strategic utilization of MSE funding can fast track the recovery process, reduce unemployment and increase individual’s disposable income since, as a platform for business investment capital, it is designed to facilitate growth of the private sector. 

She explained that currently MSE has three platforms that companies can utilize; The Main Board is for well established companies; the Alternative Capital Market Board targets small and medium enterprises while the Debt Board is for entities that would prefer not to use equity financing.

“Raising capital through the Exchange offers various benefits for a company including access to a wider pool of funds, access to cheap capital, increased visibility, enhanced corporate governance among others,” she said stressing that the role of the MSE is more pronounced now during the economic recovery process.

In a bid to secure its insurers, MSE has been offering Covid-19 compliant guidelines to listed stakeholders to facilitate holding of virtual meetings at a time when face-to-face meetings are discouraged due to Covid-19. Plans are underway to engage the listed firms on how best to utilise the Exchange in raising additional capital.

“The Covid 19 pandemic had a significant impact on the traded volumes transacted in 2020,” said Kanyangale. “In as much as the performance was positive, we so believe it could have been better had we not experienced Covid 19,”

She also expressed optimism to register new listings on the market having engaged several firms on the importance of being listed.

“We have had a number of engagements with potential issuers who had expressed interest to raise capital through the equity and bond platforms. It is too early to confirm on anything but we are hopeful that we will register new listings on the market,” she said

Established in 1994, MSE started equity trading in 1996 with National Insurance Company Limited (NICO) as the first listed firm and it has so far listed 16 companies.

The Competition and Fair Trading Commission (CFTC) has warned traders in the country to stop claiming that some of their products cure the novel coronavirus (Covid-19) pandemic.  

CFTC Executive Director James Kaphale says in a statement that it is unfortunate that some traders in the country have been promoting and marketing certain products as cure or treatment for Covid-19 but currently no Covid-19 cure has been identified and approved by World Health Organization (WHO).

Kaphale says: “According to international health authorities, there is no clinically tested and approved product which can cure Covid-19.”

“Any trader found presenting that their product can cure Covid-19 would be violating the Competition and Fair Trading Act and the Consumer Protection Act.”

“Similarly, any trader found pricing excessively would be infringing the law.”

One of the mandates for the Commission is to protect Malawians from unfair trading practices.

Kaphale, therefore, says since the outbreak of the pandemic, CFTC has been actively monitoring the market and inspecting business premises to ensure that opportunistic pharmaceuticals companies and traders were not taking advantage of the pandemic to infringe on the rights of consumers.

He says during the campaign, the Commission observed that some pharmaceuticals companies and traders were taking advantage of the pandemic to exploit consumers through deceptive conduct and excessive pricing of essential personal protective equipment (PPEs) used in the management of Covid-19.

Kaphale says: “To deal with the suspected infringements, the Commission has instituted formal investigations against five pharmaceutical companies and traders.”

“The Commission will impose stiff sanctions against any pharmaceutical company or trader found engaging in deceptive practices or any other trade malpractices such as excessive pricing in the supply of products used in the management of Covid-19.”

Meanwhile, Kaphale has appealed to consumers to observe laid down health rules as a way of mitigating the spread of Covid-19.

The Malawi Government reduced tax on any essential imported products used in the management of Covid-19 pandemic including hand sanitizers, face masks, hand washing soaps, oxygen and oxygen regulators.

Malawi has registered over 30 thousand covid-19 cases, with total deaths at 1021 and total recovery at 17184.

During the second wave of the pandemic, majority of the confirmed cases are from local transmissions which means abiding by preventive measures could be a remedy to tame spread of the virus in the country.

According to section 43 (1)(d) of the CFTC, a person shall not, in relation to a consumer, engage in conduct that is likely to mislead the public as to the nature, price, availability, characteristics, suitability for a given purpose, quantity or quality of any products or services.

Further section 43 (1)(g) of the CFTC explains that a person shall not, in relation to a consumer, engage in unconscionable conduct in trade of goods and services.

Malawi has abundant natural resources as one of the extractives and yet gains little tax revenue from the extraction of its resources, leading to lost opportunities to invest in public services such as education and health which are essential in tackling poverty. Multinationals/Privately owned companies are always caught up dodging in paying their fair share of taxes to host governments. In Malawi, there might be a considerable calculated amount that is avoided by mining companies only that it is not exposed. Prominent companies that were/have been in the playing field are exploration companies who do not owe much to the government because they are not yet into mining, the Kayelekera Uranium Mine(KUM) now under Lotus Resources, Cement and Coal companies just to mention at the moment. There have been complex reporting by OXFAM on details of tax avoidance including mispricing/dodging, production sharing agreements of oil/gas blocks. The report also describes other ways in which Malawi loses out on tax revenue, including illegal tax evasion by companies. One aspect of tax avoidance is the lack of access by government officials to information on company operations, production and pricing.

Combating tax dodging strategies will require adequate government capacity and expertise which currently does not exist in Malawi. With such developments, so many billions of kwachas are lost where if it was realized by the government, money could be spent on essential public services such as health and education. There is a heavy public outcry from civil society over lost tax revenues in Malawi and the nation hasn’t seen any action by the government to address how mining companies in particular avoid tax. There is need to reform the tax system although there can be resistance from mining corporations. An example is Zambia where when there was an attempt to introduce reforms in tax systems in mining, multinational companies threatened to cut thousands of jobs and billions of dollars of investment. The IMF also expressed concern over the impact of the measures and the impact of lower global commodity prices on government revenues. This pressure had an effect and the government rolled back on the proposed new measures.

Malawi is earning very little from mining and one of the contributing factors is the proliferation of illegal gold mining. During the SONA (State of Nation Address) by the State President Dr Lazarus Chakwera made during the official opening of the budget meeting of the National Assembly in 2020, it was alleged that about 85 million US dollars is lost by smuggling/exporting gold that finds its way to points of sale to the Middle East annually and this drew mixed reactions from stakeholders in the mining sector. In other countries, a string of NGO, media and academic reports in recent years have highlighted how mining companies, while producing a large amount of minerals, have been paying few taxes to the government.

1. Corporate tax avoidance

There are various reasons why mining companies pay lower taxes than they should, but one major reason is corporate tax avoidance. In most African countries the mining industry is identified as the biggest culprit in tax avoidance. The reason is that most of the mines for one reason or another always claim that they are making losses. Most of it is due to transfer pricing or tax avoidance. It is therefore very important for countries to develop laws that will criminalize false reporting. Mining companies avoid paying tax by means of two methods. One is through transfer pricing – the widespread practice whereby parts of the same company trade with each other at artificial prices determined by themselves, to minimize taxes. The other is that some parent companies lend money to subsidiaries at interest rates higher than market rates, in order to inflate costs and reduce taxable income. This in essence makes companies to be presented with a variety of ways to avoid paying tax, including over-reporting of costs and under-reporting of production.

2. Tax evasion

The big global mining companies are robbing the opportunities for the countries to advance. In addition to legal methods of tax avoidance, countries lose more revenues from illegal tax evasion. US-based organization Global Financial Integrity, which has pioneered recent research into illicit financial flows, estimates that some billions of US dollars from other countries must have left from the proceeds of crime, corruption and tax evasion. If this money were taxed at the prevailing corporate tax rate, it would increase the countries revenues. Some illicit outflows is attributed to trade misinvoicing, a process that deliberately misreports the value of a commercial transaction on an invoice submitted to customs. This form of trade based money laundering is the largest component of illicit financial outflows measured by Global Financial Integrity and is sometimes facilitated by global tax havens.

3. Tax incentives

Tax incentives given by the government to companies, especially in the mining sector, are another cause of lost revenues. Government offers a bunch of tax incentives to domestic and foreign companies. For example in other African countries companies investing over a certain amount pay no taxes on profits for the first five years, along with no import duties on raw materials, capital goods, machinery including dump trucks and specialized motor vehicles. Mining companies are entitled to 100% capital reductions on mining equipment and preproduction capital expenditure, the ability to carry forward losses and offset them against tax, and a rebate on import duties for certain mining equipment. In addition, all companies investing over certain million US dollars are entitled to negotiation with the government for additional incentives, thus all mining companies are given special tax deals. This is a major reason why many mining companies consistently declare tax losses. Malawi signed one of the funniest deals for a 10 year tax holiday with Paladin Africa Ltd, a company that held the Kayelekera Uranium Mine and yet production was run for less than 10 years until it was placed under “Care and Maintenance’

4. Key tax avoidance strategies

Companies seeking to avoid paying tax can use a number of different strategies. The key is for the government authorities to stop them doing so. Officials face problems with four key tax avoidance strategies.

(a) Transfer pricing abuse

In light of the fact that the global mining industry is dominated by multinational companies trading between different operating units in different countries, companies can reduce their overall tax payments by selling goods and services from an operating unit in a low tax jurisdiction to one in a higher tax jurisdiction at a relatively high price, transferring income away from the high tax jurisdiction.

 (b) Under-reporting production values

Mining companies report to the tax authority that their production is less than the market value. In such situations, they can under-report the volume of production or the grade of the mineral. A problem for the government is to check the quality and content of all production line which requires an understanding of the geology of the area being mined and the processing technology employed which requires close cooperation between the mine and the tax authority in providing sustainable checks and balances. This process becomes complicated by the often complex value chain involved in large-scale  mining like copper, where some refining and/or smelting is often carried out by separate or associated companies and elements of the potential tax base can be transferred.

(c) Interest payments on debt

 Involves deductions from profits when determining taxable income. This creates an incentive for a company to lend funds to a subsidiary at a high interest rate in order to reduce the subsidiary’s taxable profits.

(d) Purchase of derivative contracts

Mining companies that face volatile prices of their product, can guarantee a specific price for their output in the future. This acts as an insurance against a fall in the price of the commodity. It becomes a legitimate business activity but can also be used to shift income out of high tax jurisdictions. In this case, firms can deliberately trade in order to lose money in a subsidiary facing a high tax rate and to gain in another subsidiary facing a lower tax rate.

To combat these policies, it requires adequate government capacity, which in most cases does not exist. The trickiest part is that no one, except the mining companies themselves, knows what the costs of production really are and that it is not possible to determine how much return the mining companies make. Furthermore, excessive lack of resources and efforts by mining companies to hide data and manage perceptions leaves most states with virtually no information on the operations or production of the mining companies. Greater capacity and expertise is needed not only to monitor the mines’ production and accounts but also to propose different tax designs during the course of negotiations with companies. Ofcourse in other countries there may be support from donors/lenders to increase tax capacity in a form of cooperative programmes. It is on record that this also happened between the IMF, the Norwegian government and the Zambia Revenue Authority at one time.

The Malawi Revenue Authority (MRA) says it is impressive with its revenue collection figures despite the prevalence of the novel coronavirus (Covid-19) pandemic which has hit the industry.

MRA’s Head of Corporate Affairs Steven Kapoloma told Mining & Trade Review in an interview that the impressive performance is as a result of interventions that the tax collector has put in place to widen the tax net.

Kapoloma explained that to ensure that it continues meeting its targets, the body is persistently working on bringing new members into the tax net, conducting public awareness meetings on the importance of tax remission and protecting its clients from Covid-19.

Despite the pandemic, MRA managed to collect a significant amount of money during the first half of 2020/2021 financial year. From July to December 2020, it collected K530.86-billion against the overall target of 1.1-trillion the development he described as impressive and attributed to the spirit of dedication of MRA officers.

“We believe the performance will improve in the third and last quarter because we have put in place a number of interventions aimed at increasing revenue collection, despite Covid-19 pandemic,” said Kapoloma.

In a bid to reduce Covid-19 transmissions among its clients and employees, MRA ensures that people visiting their offices follow all government set preventative measures.

Kapoloma also said the organization has decongested its offices through the use of automated service delivery kits such as electronic payments.

He said those at the borders have been provided with a pre-clearance facility which allows importers and exporters to submit their declarations and supporting documents for processing before the arrival of their goods.

“We have online transaction platforms that allow importers and exporters to process Customs transactions on line and real time, which use Customs Management Systems called ASYCUDA. The systems also interface with government agencies such as Directorate of Road Traffic and Safety Services (DRTSS), Reserve Bank of Malawi (RBM), Malawi Police Services (MPS) and International Police (INTERPOL),” said Kapoloma.

He, however, bemoaned the increase in cases of tax invasion and smuggling of goods but said the tax collector is tirelessly working on combating the malpractices.

Kapoloma sounded hopeful that the organization will soon win the fight against tax evasion and smuggling, through sensitizing the general public on the importance of tax remission.

He said MRA also encourages the general public to report to their offices anyone evading tax and smuggling goods.

“MRA conducts routine intensive patrols through the Flexible Anti-Smuggling Teams (FAST). We have fixed roadblocks operating in all the three regions of the country, which are in addition to mobile roadblocks we mount from time to time to control smuggling.

MRA is a public agency which was established by Act of parliament 1998 to assess, collect and account for tax revenues

Local agricultural experts have forecast bumper yields in Malawi this year, a development they attribute to good rains being received throughout the country and government’s initiated Affordable Input Program (AIP)

The experts predict that small scale farming households will achieve national food security while surpluses will be sold to strengthen household financial bases.

Famine Early Warning Systems (FEWSNET) published on its website this week: “Farmers are anticipating good harvests this year, as overall cummulative rainfall from October 2020 to March 2021 is expected across the country, with localized areas above average and below average possible. At national level, average to slightly above average production is expected,”

Agricultural analyst Tamani Nkhono Mvula agreed that good rains coupled with the subsidized farm input program have given the country hope for bumper yields. He expressed optimism that there is a possibility of continued good rains, until the end of the season.

“We have really been receiving good rainfall in almost all parts of the country which coupled with the increase in number of AIP beneficiaries who planted hybrid seeds gives us hope for better yields this year. If rainfall continues with the current pace, then bumper yields are guaranteed,” said Mvula.

But Mvula complained that the only thing that might affect the yields are the fall-army worms that have attacked some gardens in some parts of the country, particularly in the central region.

Farmers Union of Malawi (FUM) also complained that the fall army worms might have a negative effect to the anticipated yields.

FUM President Frighton Njolomole, therefore, urged all Extension Planning Areas (EPA) to be alert.

Ministry of Agriculture spokesperson Gracian Lungu said even if results of first round yield estimates were not yet officially released, there were strong indications that the country would produce more maize this year, due to the increased uptake of inputs and good rains.

At the onset of the rainy season, the Meteorological and Disaster Management Department (MDMD) forecasted that the country would receive good rains this season.